Credit Risk Analysis and Real Option Valuation

Real Options have emerged as a way to capture the§value of managerial flexibility embedded in§investments allowing managers to generate new§opportunities. This methodology is applied to a real§estate project where the optimal strategy§(simultaneous vs. sequential), construction time, and§exclusive rights to the land are determined. §Real Options are also applied to credit risk, where§default occurs the first time the exchange rate§crosses the default barrier. A two-phase calibrated§structural model is proposed for the estimation of§the sovereign spreads and default probabilities of§Brazil, Mexico, Russia and Turkey.§§Alternatively, Fuzzy c-Means (FCM) clustering§provides several advantages over the heavily used§discriminant analysis. A weighted FCM algorithm is§proposed for the estimation of the credit risk of the§Brazilian electricity pool, the free-rider problem§introduced by the regulation, and the correct cost of§capital for new power generation.§§Finally, Fuzzy Real Options have appeared as a method§to handle imprecision and non-statistical§uncertainty. The method is reviewed and applied to a§Giga-investment project in the energy sector§providing reasonable results.