Creation and Valuation of Real Options in Engineering Systems

Daniel J. Epstein Department of Industrial and Systems Engineering Seminar"Creation and Valuation of Real Options in Engineering Systems"Rania Hassan, Ph.D.Department of Aeronautics & Astronautics and the Engineering Systems Division, Massachusetts Institute of TechnologyABSTRACT: In financial markets, options and derivatives on securities have been adopted as mechanisms to cope with uncertainty. Building on financial options, Real Options Analysis has been emerging in the past few years as a set of tools, or perhaps a discipline, that applies ideas from quantitative finance to "real" assets such as engineering projects for the purpose of managing uncertainty. Dr. Hassan's research presents a Real Options approach for the design and valuation of complex engineered systems that integrates physics-based modeling and engineering design with economic analysis for the purpose of maximizing system's value over its lifetime under uncertain, evolving conditions. The objective of this research is two fold. First, this work brings attention to the often ignored side of Real Options research, which is the creation, rather than the mere valuation, of Real Options in engineering systems. Options are designed into a system by leveraging technical flexibility in engineering design so as to mitigate risk (the downside of uncertainty) and capitalize on potential opportunities (the upside of uncertainty). Second, this research proposes a simple and transparent, yet powerful, valuation approach that is suitable for complex engineering systems. Some foundational concepts and tools pertinent to the design of complex systems will be discussed, including: design optimization under uncertainty, flexibility versus robustness, reliability engineering, decision tree analysis, heuristic search methods, multi-objective optimization, hierarchical optimization, and probabilistic approaches. Case studies on spacecraft design, satellite fleets, space exploration architectures, oil pipeline networks, and underwater combat submersibles will be presented to aid the discussion. TUESDAY, MAY 13, 2008, GERONTOLOGY BUILDING (GER) ROOM 309, 1:30 – 2:30 PM

Location: Ethel Percy Andrus Gerontology Center (GER) - 309

Audiences: Everyone Is Invited

Contact: Georgia Lum