Carlos de Lamare Bastian-Pinto

Valuing the switching flexibility of the ethanol-gas flex fuel car

Renewable energy sources are becoming more important as the world’s supply of fossil fuels decrease and also due to environmental concerns. Since 2003, when the ethanol-gasoline flex fuel car became commercially available in Brazil, the growth of this market has been significant, to the point where currently more than 50% of the fuel consumption of cars in Brazil is from renewable biofuels (ethanol). This has been made possible due to the success of the flex fuel car, which can run on ethanol, gasoline, or any mix of these in the same fuel tank, and which is sold at a premium over the non-flex models.Flex fuel cars, on the other hand, provide the owner with the flexibility to choose fuels at each refueling stop. Given the uncertainty on future prices of ethanol and gas, this option adds value to the owner since he can always opt for the cheaper fuel whenever he fills up his car. We use the Real Options method to analyze the value of the flex fuel option assuming both a Geometric Brownian Motion and Mean Reverting diffusion processes for the prices of gasoline and ethanol and compare the results arising from both methods. We conclude that the flex option value is significant using either method and twice as high as flex premium charged by the car manufacturers, which helps explain the success that this type of automobiles have gained in Brazil since 2003. Our results also indicate that consumers should be willing to purchase flex fuel cars even if manufacturers increase the flex premium.

Government Supports in Public-Private Partnership Contracts: Metro Line 4 of the Sao Paulo Subway System

In November 2005, the state government of Sao Paulo, Brazil, announced the intention to bid a 30-year contract to build, operate, and explore passenger services for the Metro Line 4 of the Sao Paulo Metropolitan Subway System. Given the high risk of the project, to attract private investors the bid documents stipulated that the government would offer risk-mitigation mechanisms such as subsidy payments and a minimum demand guarantee (MDG). Because an MDG has option-like characteristics, the real-options approach is used to analyze the effect of these incentives on the value and the risk of the Metro Line 4 concession project, and their cost and risk to the government. The results indicate that the incentives proposed are effective in reducing the risk, and increase the net value of the project by 36% at a cost to the government of 5% of the total value of the project. Additionally, it is shown that for a given cost, the most effective risk-reduction mechanisms are the ones that include a higher portion of minimum demand guarantees relative to the subsidy payment. The approach developed can assist transportation authorities in designing optimal incentive mechanisms.

The value of switching inputs in a biodiesel production plant

There has been a growing concern in recent years about the quality of the environment and dependence on fossil fuels to supply the worlds energy needs, which has created an interest in the development of renewable and less polluting energy sources. One of these alternatives is the biodiesel fuel, which has many advantages over the fossil based diesel, or petro diesel. In this paper we use the real options approach to determine the value of the managerial flexibility embedded in a biodiesel plant that has the option to switch inputs among two different grain commodities. Our results indicate that the option to choose inputs has significant value if we assume that future prices follow stochastic processes such as Geometric Brownian Motion and Mean Reversion Models, and can be sufficient to recommend the use of input commodities that would not be optimal under traditional valuation methods. We also show that the choice of model and parameters has a significant impact on the valuation of this class of projects.

Flexibility and uncertainty in agribusiness projects: investing in a cogeneration plant

La generacion de energia de la biomasa se ha convertido en una fuente creciente de interes en vista de la creciente preocupacion sobre el posible agotamiento de los combustibles fosiles en todo el mundo. En este articulo nos fijamos en una planta productora de azucar y etanol en Brasil, que tiene tan bien una posibilidad de expansion como una opcion de agregar una unidad de cogeneracion que le permita la venta de energia excedente generada por la quema del bagazo de cana de azucar, mientras que la segunda opcion es dependiente de la primera. Fueron modelados los precios del azucar, etanol y electricidad, como procesos de reversion a la media geometrica y fue aplicado el enfoque de opciones reales para cuantificar esta flexibilidad en la gestion, ya que estas dos opciones tienen diferentes activos subyacentes. La opcion de expandir la produccion es una funcion del valor esperado de los precios de futuros de azucar y etanol, mientras que la opcion de invertir en una planta de cogeneracion dependera del precio futuro de la electricidad. Ambas decisiones se modelan como opciones americanas compuestas sobre sus activos subyacentes. El modelo se resuelve utilizando un arbol binomial recombinante para reversion sin censura a la media propuesta por Bastian-Pinto, Brandao y Hahn (2010) utilizando el software DPLTM. Los resultados indican que la flexibilidad de escoger el momento optimo para invertir en las dos opciones de expansion genera un valor significativo: la inversion en la unidad de cogeneracion anade un valor igual a la expansion de la produccion de azucar y etanol, y representan a 44% del VAN proyectado tradicional de

Modeling Generic Mean Reversion Processes with a Symmetrical Binomial Lattice - Applications to Real Options☆

195,900,000. Se concluye que, dado que solo la mitad de las plantas de cana de azucar en Brasil tienen unidades de cogeneracion instaladas, y tambien dada la demanda cada vez mayor de fuentes limpias y renovables de energia, esto puede indicar que existe un potencial importante para inversiones y desarrollo de unidades de cogeneracion de bioelectricidad, asi como de adaptacion de las plantas mas viejas, y que los incentivos que el gobierno ha dado son una contribucion efectiva en este desarrollo.A geracao de energia a partir da biomassa tem se tornado uma fonte crescente de interesse em funcao das crescentes preocupacoes com a possivel exaustao das reservas de combustiveis fosseis mundiais. Neste artigo, analisamos uma planta de producao de acucar e etanol no Brasil, a qual possui tanto uma opcao de expansao quanto uma de agregar uma unidade de cogeracao, a qual permitiria a venda de energia excedente, gerada a partir da queima do bagaco da cana-de-acucar, e a segunda opcao e condicionada pela implementacao da primeira. Modelamos os precos de acucar, etanol e energia eletrica como processos de reversao a media geometrica e aplicamos a abordagem de opcoes reais para quantificar essas flexibilidades gerenciais, considerando que essas duas opcoes possuem diferentes ativos subjacentes. A opcao de expansao de producao e funcao do valor esperado dos precos futuros de acucar e etanol, enquanto a opcao de investir numa planta de cogeracao ira depender dos precos futuros de energia eletrica. Ambas as decisoes sao modeladas como opcoes americanas compostas sobre seus respectivos ativos subjacentes. O modelo e resolvido utilizando uma arvore binomial recombinante nao censurada para reversao a media proposta por Bastian-Pinto, Brandao e Hahn (2010) usando o software DPLTM. Os resultados indicam que a flexibilidade de escolha do momento otimo de investir em ambas as opcoes de expansao gera um valor significativo: o investimento na unidade de cogeracao agrega um valor equivalente ao valor da expansao de producao de acucar e etanol, e representam ate 44% do VPL tradicional de R

Incentivos governamentais em PPP: uma análise por opções reais

195,9 milhoes do projeto. Concluimos que, dado que somente a metade das usinas de processamento de cana-de-acucar existentes hoje no Brasil tem unidades de cogeracao instaladas, e em razao tambem da sempre crescente demanda por fontes limpas e renovaveis de energia, isso pode indicar que existe um potencial significativo para investimento e desenvolvimento de unidades de cogeracao de bioeletricidade, assim como do retrofit de usinas mais antigas, e que os incentivos do governo vem sendo efetivos na contribuicao a esse desenvolvimento.

Valuing flexibility in electro-intensive industries: the case of an aluminum smelter

Abstract In this paper we propose a Symmetrical Binomial Lattice Approach that is equivalent to the well-known and widely utilized Lattice of Cox, Ross & Rubinstein when modeling Geometric Brownian Motion type of processes, but can be utilized for a wide variety of other Markov style stochastic processes, such as Mean Reversion. This is due to the highly intuitive construction in which first the expected value expression of the process is directly used and the variance is modeled in a symmetrical lattice, which is added to the first. We then demonstrate its applicability with several Real Options examples, comparing to the Cox et al model.

Governmental incentives in PPP: an analysis with real options

On November 2005 the State Government of Sao Paulo, Brazil, announced the intention to bid a contract to provide passenger services for the Line 4 of the Sao Paulo Metropolitan Subway System. In this article we use the real options approach to analyze the effect of the government guarantees provided in the contract on the value and the risk of the project, as well as the cost and the risk of these guarantees to the government. The results indicate that the incentives proposed are effective in reducing the risk and increase the net value of the Project by 36% at a cost to the State of only 5% of the total value of the project. Additionally, we show that for a given cost to the government, the most effective risk reduction mechanisms are the ones that include a higher portion of demand guarantees in relation to the investment subsidy.Em novembro de 2005, o Governo do Estado lancou edital de licitacao para servicos de transporte de pas- sageiros da Linha 4 do Metro de Sao Paulo. Neste tra- balho, utilizamos a metodologia de opcoes reais para modelar o impacto dos incentivos governamentais existentes no contrato de concessao sobre o valor do projeto, determinar o grau de reducao de risco obtido e o seu custo para o Estado. Os resultados indicam que estes incentivos sao eficazes em reduzir o risco do projeto e aumentam o seu resultado em 36%, a um custo para o Estado de 5% do valor total do projeto. Adicionalmente, analisamos tambem a relacao custo/ beneficio para o Estado de modelos alternativos de mitigacao de risco e mostramos que, sem aumentar o custo para o Governo, a eficacia desse mecanismo pode ser incrementada aumentando-se o peso da par- cela de garantia de demanda em relacao a parcela de contraprestacao. Abstract On November 2005 the State Government of Sao Paulo, Brazil, announced the intention to bid a contract to provide passenger services for the Line 4 of the Sao Paulo Metropolitan Subway System. In this article we use the real options approach to analyze the effect of the government guarantees provided in the contract on the value and the risk of the project, as well as the cost and the risk of these guarantees to the government. The results indicate that the incentives proposed are effective in reducing the risk and increase the net value of the Project by 36% at a cost to the State of only 5% of the total value of the project. Additionally, we show that for a given cost to the government, the most effective risk reduction mechanisms are the ones that include a higher portion of demand guarantees in relation to the investment subsidy.

Incentivos gubernamentales en APP: un análisis por opciones reales

Electro-intensive industries account for a significant proportion of the total industrial electricity consumption, and these industries usually possess co-generation assets, which can supply at least part of their energy needs. However, due to price uncertainty, it may be optimal for the firm to temporarily suspend production and sell the available energy. If this strategy creates value, governments can create incentives through price signals for these firms to take their plants offline and increase the supply of electricity during times of shortage. This study analyzes the case of an aluminum plant that has the choice of temporarily suspending operations and models its managerial flexibility as a bundle of European switch options. The suspension and modeling would occur under two simultaneous situations, uncertainty and asymmetric state switching costs under the real options approach, to determine whether the changes add value to the firm. The results indicate that this flexibility can add significant value to the firm.

Flexibilidad y incertidumbre en proyectos de agronegocios: la inversión en una planta de cogeneración

On November 2005 the State Government of Sao Paulo, Brazil, announced the intention to bid a contract to provide passenger services for the Line 4 of the Sao Paulo Metropolitan Subway System. In this article we use the real options approach to analyze the effect of the government guarantees provided in the contract on the value and the risk of the project, as well as the cost and the risk of these guarantees to the government. The results indicate that the incentives proposed are effective in reducing the risk and increase the net value of the Project by 36% at a cost to the State of only 5% of the total value of the project. Additionally, we show that for a given cost to the government, the most effective risk reduction mechanisms are the ones that include a higher portion of demand guarantees in relation to the investment subsidy.Em novembro de 2005, o Governo do Estado lancou edital de licitacao para servicos de transporte de pas- sageiros da Linha 4 do Metro de Sao Paulo. Neste tra- balho, utilizamos a metodologia de opcoes reais para modelar o impacto dos incentivos governamentais existentes no contrato de concessao sobre o valor do projeto, determinar o grau de reducao de risco obtido e o seu custo para o Estado. Os resultados indicam que estes incentivos sao eficazes em reduzir o risco do projeto e aumentam o seu resultado em 36%, a um custo para o Estado de 5% do valor total do projeto. Adicionalmente, analisamos tambem a relacao custo/ beneficio para o Estado de modelos alternativos de mitigacao de risco e mostramos que, sem aumentar o custo para o Governo, a eficacia desse mecanismo pode ser incrementada aumentando-se o peso da par- cela de garantia de demanda em relacao a parcela de contraprestacao. Abstract On November 2005 the State Government of Sao Paulo, Brazil, announced the intention to bid a contract to provide passenger services for the Line 4 of the Sao Paulo Metropolitan Subway System. In this article we use the real options approach to analyze the effect of the government guarantees provided in the contract on the value and the risk of the project, as well as the cost and the risk of these guarantees to the government. The results indicate that the incentives proposed are effective in reducing the risk and increase the net value of the Project by 36% at a cost to the State of only 5% of the total value of the project. Additionally, we show that for a given cost to the government, the most effective risk reduction mechanisms are the ones that include a higher portion of demand guarantees in relation to the investment subsidy.