Speaker : Alain Bensoussan
Date : 16April2011 (Sat)
Venue: T2, Meng Wah Complex, University of Hong Kong.
Lecture : 4:00-5:00pm
Reception : 5.00-6.00pm
Abstract : Real Options theory is an approach to mitigate risks of Investment projects, which is based on two ideas. The first one is Hedging, borrowed from financial options, when market Considerations can be introduced. The project risk must be correlated to the market risk, in which case tradable assets can be used to hedge. The second idea is flexibility. One wishes to introduce flexibility in the decision making process. In particular, one may scale down or up the project, one may stop it, one may change orientation. This flexibility allows reacting properly when Information is obtained on the uncertainties of the evolution.
We review in this presentation some of the major possibilities of flexibility, to defer, to abandon, mothballing. We also consider some extensions on the investment cost, for instance the situation of tax incentives.
We show that the technique of Variational Inequalities is the right mathematical tool to model these situations. The models are developed in continuous time, where the elegant rules of Ito’s calculus apply. The concepts are discussed independently of these techniques. One important difference between real options and financial options relates to the need of considering competition. We show that differential games with stopping times are the natural mathematical framework for these problems. However we get non standard problems, which lead to interesting mathematical and economic questions
Biography : Alain Bensoussan is Ashbel Smith Professor and the Director of ICDRiA at the University of Texas at Dallas. He is also Chair Professor of Risk and Decision Analysis at the Hong Kong Polytechnic University and World Class University Distinguished Professor at Ajou University. He is Professor Emeritus at the University of Paris Dauphine and has an extensive research background in stochastic control, probability and stochastic processes. Professor Bensoussan served as President of National Institute for Research in Computer Science and Control (INRIA) from 1984 to 1996; President of the French Space Agency (CNES) from 1996 to 2003; and Chairman of the European Space Agency (ESA) Council from 1999 to 2002. He is a member of the French Academy of Sciences, French Academy of Technology, Academia Europae, and International Academy of Astronautics. His distinctions include IEEE Fellow, SIAM Fellow, Von Humboldt award, and the NASA public service medal. Professor Bensoussan is a decorated Officer of Legion d’Honneur , Commandeur Ordre National du Merite and Officer Bundes Verdienst Kreuz.
