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pslct040

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<publicationStmt><distributor>BASE and Oxford Text Archive</distributor>

<idno>pslct040</idno>

<availability><p>The British Academic Spoken English (BASE) corpus was developed at the

Universities of Warwick and Reading, under the directorship of Hilary Nesi

(Centre for English Language Teacher Education, Warwick) and Paul Thompson

(Department of Applied Linguistics, Reading), with funding from BALEAP,

EURALEX, the British Academy and the Arts and Humanities Research Board. The

original recordings are held at the Universities of Warwick and Reading, and

at the Oxford Text Archive and may be consulted by bona fide researchers

upon written application to any of the holding bodies.

The BASE corpus is freely available to researchers who agree to the

following conditions:</p>

<p>1. The recordings and transcriptions should not be modified in any

way</p>

<p>2. The recordings and transcriptions should be used for research purposes

only; they should not be reproduced in teaching materials</p>

<p>3. The recordings and transcriptions should not be reproduced in full for

a wider audience/readership, although researchers are free to quote short

passages of text (up to 200 running words from any given speech event)</p>

<p>4. The corpus developers should be informed of all presentations or

publications arising from analysis of the corpus</p><p>

Researchers should acknowledge their use of the corpus using the following

form of words:

The recordings and transcriptions used in this study come from the British

Academic Spoken English (BASE) corpus, which was developed at the

Universities of Warwick and Reading under the directorship of Hilary Nesi

(Warwick) and Paul Thompson (Reading). Corpus development was assisted by

funding from the Universities of Warwick and Reading, BALEAP, EURALEX, the

British Academy and the Arts and Humanities Research Board. </p></availability>

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<recording dur="00:44:26" n="5902">

<date>09/03/2000</date><equipment><p>audio</p></equipment>

<respStmt><name>BASE team</name>

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<person id="nm0966" role="main speaker" n="n" sex="m"><p>nm0966, main speaker, non-student, male</p></person>

<person id="su0967" role="participant" n="s" sex="u"><p>su0967, participant, student, unknown sex</p></person>

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<personGrp id="sl" role="all" size="m"><p>sl, all, medium group</p></personGrp>

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<item n="speechevent">Lecture</item>

<item n="acaddept">Business</item>

<item n="acaddiv">ps</item>

<item n="partlevel">PG</item>

<item n="module">Real options</item>

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<u who="nm0966"> for foreign students <pause dur="0.7"/> and also to see what idiosyncracies lecturers have <pause dur="0.8"/> so <pause dur="0.3"/> <shift feature="voice" new="laugh"/> right so <vocal desc="laughter" iterated="y" dur="2"/> <shift feature="voice" new="normal"/><pause dur="0.7"/> let's go <pause dur="0.7"/> # next week <pause dur="0.2"/> last week <pause dur="0.9"/> just to confirm <pause dur="2.2"/> no lecture <pause dur="0.6"/> on the last day of term <pause dur="0.4"/> so <pause dur="0.2"/> this <pause dur="0.2"/> will not take place next week <pause dur="1.9"/> ah <pause dur="3.5"/> # i'm going to run <pause dur="1.1"/> open access <pause dur="0.3"/> for the computer workshops next week <pause dur="0.2"/> it's the turn of the portfolio management groups <pause dur="0.8"/> # but as <pause dur="0.2"/> there are a lot of common <pause dur="0.4"/> students between the two <pause dur="0.5"/> so if you want to come in and <pause dur="0.2"/> go through <pause dur="0.7"/> parts on your projects and anything else on the capital raising <pause dur="0.3"/> open access <pause dur="0.8"/> next week <pause dur="0.6"/> at any time <pause dur="0.4"/> it would be helpful if the portfolio management people keep to their group schedule <pause dur="0.8"/> and then anybody that <pause dur="0.2"/> sort of wants to drop in or drop out <pause dur="0.5"/> we can # <pause dur="0.2"/> pick up <pause dur="0.2"/> questions and other things on projects <pause dur="0.4"/> as we go through <pause dur="4.0"/> # <pause dur="0.3"/> i've dropped leasing from the syllabus <pause dur="0.6"/> 'cause i was away last week and just won't have time to pick it up <pause dur="0.4"/> so that's <pause dur="0.2"/> out of the syllabus <pause dur="1.9"/> and <pause dur="0.2"/> # <pause dur="1.4"/> i've included <vocal desc="laughter" iterated="y" dur="1"/><pause dur="0.2"/> the more complicated <pause dur="0.2"/> convertible bond file <pause dur="0.9"/> on <pause dur="2.1"/>

the modelling techniques <pause dur="0.6"/> on the simulation it's called C-B Monty Put Call <pause dur="0.4"/> it's in the Q drive <pause dur="0.4"/> this reconciles with <pause dur="0.2"/> <gap reason="name" extent="2 words"/>'s file <pause dur="0.8"/> so if you want to use this in the project and <pause dur="0.3"/> have a put or a call or whatever you want <pause dur="0.2"/> you can <pause dur="0.3"/> reconcile it back to <gap reason="name" extent="1 word"/>'s model <pause dur="0.4"/> and use that as well <pause dur="0.6"/> you should be able to <pause dur="0.6"/> follow it it's # <pause dur="0.4"/> instead of having one bullet option it's got a series of options <pause dur="0.5"/> and <trunc>tr</trunc> goes through ten years like the # <pause dur="0.6"/> ten periods <pause dur="0.8"/> like the binomial model <pause dur="0.7"/> so that's on <pause dur="0.7"/> the Q drive <pause dur="0.8"/> if you want to use it <pause dur="24.8"/> okay there's a handout <pause dur="0.7"/> on this <pause dur="1.7"/> just over here <pause dur="0.5"/> if you want to pick it up later <pause dur="8.4"/> i'm # <pause dur="0.5"/> i'm going to go through <pause dur="1.3"/> the theory <pause dur="0.4"/> of real options <pause dur="1.1"/> and then <pause dur="0.2"/> i'm going to show you <pause dur="1.5"/> how they can be <pause dur="1.2"/> used <pause dur="0.8"/> to <pause dur="0.6"/> raise some money <pause dur="1.0"/> particularly on property assets <pause dur="3.8"/> real options # <pause dur="0.7"/> are a term which <pause dur="0.6"/> was coined <pause dur="1.2"/> ten fifteen years ago <pause dur="0.5"/> when people began to realize that <pause dur="0.7"/> net present value isn't the only thing <pause dur="0.5"/> that you should look at <pause dur="0.4"/> in valuing assets <pause dur="0.7"/> that <pause dur="0.2"/> a number of <pause dur="0.8"/> assets <pause dur="0.5"/> in

companies <pause dur="0.4"/> have a great deal of option value <pause dur="1.5"/> and so the <pause dur="0.7"/> option theory <pause dur="0.4"/> that you've been looking at <pause dur="0.8"/> can be also applied <pause dur="0.7"/> to <pause dur="0.3"/> real assets instead of just financial assets <pause dur="1.1"/> and that in raising money <pause dur="0.2"/> companies particularly have <pause dur="0.6"/> a lot more to offer <pause dur="0.5"/> from an option pricing perspective <pause dur="0.5"/> than they first thought <pause dur="1.1"/> the <pause dur="1.6"/><kinesic desc="changes slide" iterated="n"/> the idea on on real options is that management is just not <pause dur="0.6"/> a passive <pause dur="0.7"/> participant <pause dur="0.6"/> that management can take an active role <pause dur="0.8"/> in # <pause dur="0.8"/> in making and revising decisions <pause dur="1.1"/> that can lead <pause dur="0.4"/> # on from <pause dur="0.6"/> unexpected market developments such as for example the price of oil <pause dur="0.7"/> has gone up from # ten pounds a barrel to in excess of thirty pounds a barrel <pause dur="1.0"/> over the last year <pause dur="0.8"/> so if you were an oil <pause dur="1.4"/> producer this time last year <pause dur="0.9"/> you would be taking a very different view <pause dur="0.3"/> on the market for oil <pause dur="0.5"/> so the increase in <pause dur="0.3"/> oil prices has uncovered <pause dur="0.4"/> a stream of options <pause dur="0.3"/> which make <pause dur="0.8"/> the # the oil <pause dur="0.7"/> producers a lot more valuable <pause dur="0.5"/> and now you can bring oil fields back on stream that <pause dur="0.2"/> were not necessarily economic <pause dur="0.8"/> # so

this is the the kind of idea <pause dur="0.4"/> that when we're looking at a project <pause dur="0.4"/> we're just not looking at a static cash flow we're actually looking at a cash flow that can be subject to a lot of optionality in it <pause dur="1.2"/> so <pause dur="0.4"/> real options <pause dur="0.8"/> assume that management is not an inert force <pause dur="0.2"/> that management actually understands what it's doing <pause dur="0.7"/> and then it that it can act <pause dur="0.2"/> and react <pause dur="0.3"/> very quickly <pause dur="0.5"/> to changes in the economic environment <pause dur="0.9"/> many of the high tech companies are valued on real options <pause dur="0.6"/> in that <pause dur="0.6"/> there's so much happening <pause dur="0.3"/> in <pause dur="1.2"/> tech at the moment <pause dur="0.7"/> that <pause dur="0.2"/> # even though they're not earning current cash flows that the possibility of being able <pause dur="0.2"/> to be on the ground <pause dur="0.2"/> and earn those sort of cash flows in the future <pause dur="0.6"/> represents enormous opportunities so many of them are valued using real options <pause dur="2.4"/> the <pause dur="0.6"/> the flexibility <pause dur="1.1"/> comes down <pause dur="0.7"/> to being able to <pause dur="0.2"/> improve upside potential <pause dur="1.6"/> firstly <pause dur="0.8"/> and then it's also assumed that management will <pause dur="0.9"/> have some damage limitation on the downside losses <pause dur="1.0"/> so that it can move extremely

quickly <pause dur="0.5"/> and is not a passive entity <pause dur="0.8"/> so we've got <pause dur="0.9"/> another item here we've got <pause dur="0.3"/> a passive net present value <pause dur="0.7"/> of expected cash flows which is what you've done in the workshop <pause dur="1.1"/> over the last couple of days <pause dur="0.5"/> we've done a very passive <pause dur="0.5"/> look at it <pause dur="0.6"/> nothing has changed <pause dur="1.2"/> we've got to add to it <pause dur="1.0"/> the value of options <pause dur="0.4"/> from active management <pause dur="0.5"/> which i'm going to do in the first week of next term <pause dur="0.7"/> that we're going to make <pause dur="0.3"/> the price process stochastic <pause dur="0.5"/> and we're going to see <pause dur="0.3"/> on that <pause dur="0.4"/> fairly simple little project that you did <pause dur="0.8"/> what other <pause dur="0.6"/> areas of value <pause dur="0.4"/> that we can find out <pause dur="0.6"/> of that project <pause dur="0.5"/> and just to compare what its passive <pause dur="0.6"/> value is <pause dur="0.4"/> with what its active value is <pause dur="3.0"/><kinesic desc="changes slide" iterated="n"/> so these are the types of <pause dur="0.7"/> of real options <pause dur="1.0"/> which are available <pause dur="1.4"/> you have an option to defer a project <pause dur="1.2"/> you don't have to keep on <pause dur="0.8"/> going on with a loss making project <pause dur="1.1"/> it means you have to mothball it <pause dur="0.3"/> if you're going to defer it so there are some <pause dur="1.0"/> there are some cost to putting it in mothballs <pause dur="0.5"/> and just <pause dur="0.2"/> leaving it there <pause dur="1.5"/> there's an option

for staged investments <pause dur="1.3"/> that it's possible <pause dur="1.4"/> when you go through a product life cycle <pause dur="0.5"/> that <pause dur="0.3"/> other <pause dur="0.9"/> options become available as you are going through <pause dur="0.6"/> this life cycle <pause dur="0.4"/> and so you can look at it in a kind of a staging process that as management learns <pause dur="1.1"/> what is going on it can then <pause dur="0.3"/> acquire that new <pause dur="0.3"/> technology and go into another technology <pause dur="0.7"/> my old favourite B-T <pause dur="0.3"/> is just <shift feature="voice" new="laugh"/>starting <shift feature="voice" new="normal"/>to do that now its share price has just recovered as it's starting to <pause dur="0.7"/> find out that there are other things in the mobile market and it's making a move into the mobile market and so it's <pause dur="0.3"/> using <pause dur="0.3"/> its own platform to stage investments and to # <pause dur="0.2"/> to move through and the share price has <pause dur="0.4"/> has recognized that <pause dur="0.6"/> so it's starting to move up <pause dur="2.1"/> you can change scale <pause dur="0.9"/> on a project <pause dur="1.7"/> with the <pause dur="0.8"/> increase in oil values <pause dur="0.2"/> oil prices rather from <pause dur="0.6"/> ten <pause dur="0.4"/> dollars a barrel to thirty dollars a barrel <pause dur="0.5"/> you can most certainly bring on <pause dur="0.2"/> an huge change in scale <pause dur="0.8"/> of the projects and i would imagine

that <pause dur="0.6"/> when OPEC gets its act together it will most certainly be doing this <vocal desc="sigh" iterated="n"/> that when they finish squabbling <pause dur="0.7"/> that what we will find is they're a huge change of scale <pause dur="0.6"/> from OPEC and it will then once again as it normally does flood the market <pause dur="0.7"/> and the price will <pause dur="0.5"/> come down <pause dur="0.6"/> but <pause dur="0.4"/> this is now <pause dur="0.6"/> # with that <pause dur="0.8"/> threefold increase <pause dur="0.9"/> a huge ability to change the scale of production <pause dur="1.3"/> you can of course <pause dur="0.5"/> abandon <pause dur="1.4"/> but if you make <pause dur="0.5"/> the wrong decision <pause dur="0.9"/> there is nothing worse than throwing good money <pause dur="0.2"/> after bad <pause dur="0.8"/> and making the wrong decision <pause dur="0.5"/> so <pause dur="0.5"/> fundamentally <pause dur="0.4"/> quit <pause dur="1.1"/> so there's always an option to abandon <pause dur="1.3"/> # there are options to switch <pause dur="0.2"/> # the technology <pause dur="0.8"/> might be appropriate <pause dur="0.7"/> for <pause dur="0.2"/> another area <pause dur="1.0"/> that you could become involved in <pause dur="0.6"/> or alternatively you could switch <pause dur="0.6"/> # from gold <pause dur="0.3"/> if <pause dur="0.3"/> to silver or lead zinc <pause dur="0.6"/> if you're in a field that has gold and silver lead zinc the gold price goes down you can switch to a product <pause dur="0.6"/> which <pause dur="0.3"/> # potentially is going to give you more revenues <pause dur="1.5"/> # <pause dur="0.2"/> options to grow well that's fairly <pause dur="0.3"/> self-explanatory

and this is all the Internet <pause dur="0.6"/> all the Internet companies come in here <vocal desc="laugh" iterated="n"/><pause dur="0.4"/> that # <pause dur="0.2"/> people are seeing enormous growth options <pause dur="0.7"/> potentially in the Internet companies <pause dur="1.0"/> # and importantly <pause dur="0.8"/> # <pause dur="0.7"/> these are not <pause dur="0.7"/> mutually exclusive <pause dur="1.4"/> the there are interacting options <pause dur="0.8"/> within all of this framework so you can potentially have options on options <pause dur="1.0"/> which tend to be <pause dur="0.3"/> extremely explosive <pause dur="0.3"/> in terms of valuing things <pause dur="1.0"/> but <pause dur="0.3"/> but what this <pause dur="0.2"/> all assumes is that management is good <pause dur="1.6"/> and <pause dur="0.5"/> i think you'll probably find that over <pause dur="1.0"/> the next few years that a lot of inept management will be flushed out <pause dur="0.7"/> of the system <pause dur="0.5"/> and that <pause dur="0.2"/> the # the high fliers <pause dur="0.2"/> will <pause dur="1.0"/> have gone too near the sun and will have their wings melted <pause dur="0.8"/> and will <pause dur="0.6"/> plummet to earth <pause dur="0.2"/> in a very big way <pause dur="0.6"/> so this assumes that there is the management to be able to recognize <pause dur="0.6"/> the optionality <pause dur="0.9"/> of these opportunities <pause dur="7.5"/> just to go through those in a little bit more detail <pause dur="1.6"/><kinesic desc="changes slide" iterated="n"/> options to defer <pause dur="0.9"/> so management could hold a lease <pause dur="0.6"/> or an

option to buy valuable land <pause dur="0.3"/> or resources <pause dur="0.7"/> so it can wait for a number of years to see if output prices justify the construction <pause dur="0.7"/> of a building <pause dur="0.6"/> or a plant <pause dur="0.2"/> or a project development <pause dur="1.0"/> important in natural resources <pause dur="1.3"/> extraction <pause dur="0.7"/> real estate <pause dur="0.3"/> farming <pause dur="0.7"/> paper <pause dur="1.2"/><kinesic desc="changes slide" iterated="n"/>

those sort of industries that require a long lead and lag time <pause dur="6.8"/> <reading>have a series of outlays that create the option to abandon an enterprise in mid-stream</reading><pause dur="0.7"/> if no # <pause dur="0.2"/> new information's # <pause dur="2.2"/> if sorry <reading>if new information is unfavourable</reading> <pause dur="0.4"/> and each stage can be valued <pause dur="0.4"/> as a compound option if we're looking at stage development <pause dur="0.6"/> that's in R and D <pause dur="0.6"/> especially pharmaceuticals <pause dur="0.8"/> long development capital-intensive projects <pause dur="0.7"/> energy <pause dur="0.5"/> start-up <pause dur="3.1"/><kinesic desc="changes slide" iterated="n"/> options <sic corr="to">do</sic> alter scale <pause dur="1.4"/> if market conditions are more favourable <pause dur="0.5"/> the firm can expand <pause dur="0.2"/> or accelerate resources <pause dur="0.4"/> if they're less favourable <pause dur="0.5"/> it can reduce the scale <pause dur="0.5"/> and potentially mothball <pause dur="0.6"/> the project <pause dur="0.8"/> natural resources again <pause dur="0.4"/> mines this is particularly important in mining <pause dur="0.5"/> because of the scale of operations <pause dur="0.8"/> fashion as

well consumer goods <pause dur="0.2"/> and commercial real estate <pause dur="2.3"/><kinesic desc="changes slide" iterated="n"/> i've covered abandonment <pause dur="0.4"/><kinesic desc="changes slide" iterated="n"/> and switching <pause dur="2.0"/><kinesic desc="changes slide" iterated="n"/> and growth <pause dur="0.6"/><kinesic desc="changes slide" iterated="n"/> right <pause dur="2.9"/><kinesic desc="changes slide" iterated="n"/> now <pause dur="0.4"/> the comparison <pause dur="0.5"/> between <pause dur="0.5"/> stock <pause dur="0.5"/> and real options <pause dur="0.6"/> so these are the <pause dur="0.7"/> the variables in the <pause dur="1.4"/> financial option <pause dur="1.5"/> and these are the variables <pause dur="0.5"/> in the real option <pause dur="0.4"/> so there's slightly different nomenclature <pause dur="0.8"/> so while we've got the current value of the stock <pause dur="0.8"/> as one variable <pause dur="0.5"/> what we've got on the real options is the gross present value of expected cash flows <pause dur="0.7"/> that we're looking at valuing <pause dur="1.0"/> we've got <pause dur="0.6"/> exercise price <pause dur="0.7"/> in the financial option <pause dur="0.6"/> and we've got investment cost <pause dur="0.8"/> in the real option <pause dur="1.4"/> we've got <pause dur="0.7"/> time to expiry <pause dur="0.3"/> in the financial one <pause dur="0.7"/> and we've got time until the opportunity <pause dur="0.4"/> the investment opportunity <pause dur="0.4"/> disappears <pause dur="0.7"/> in the real option <pause dur="1.2"/> we've got <pause dur="0.8"/> stock value uncertainty <pause dur="0.8"/> measured by the standard deviation of returns <pause dur="0.6"/> and we've got project uncertainty which can be measured <pause dur="0.5"/> within the same <pause dur="0.3"/> sort of standard deviation parameters <pause dur="0.8"/> and we've got the riskless <pause dur="0.6"/> interest rate <pause dur="1.1"/> on this <pause dur="1.2"/>

financial options no we can use that <pause dur="0.5"/> because we can form the hedge portfolio <pause dur="0.8"/> and by hedging the portfolio <pause dur="0.2"/> we can assume that the asset grows <pause dur="0.6"/> at the riskless interest rate <pause dur="0.3"/> it's very difficult to form a hedge portfolio <vocal desc="laugh" iterated="n"/><pause dur="0.3"/> on a <pause dur="0.2"/> real option <pause dur="0.6"/> so we have to manage that <pause dur="1.1"/> and adjust <pause dur="1.1"/> the interest rate and i'll come to this in an example fairly shortly <pause dur="0.5"/> by what's known as the market price of risk <pause dur="1.4"/> to bring us back into a risk <trunc>u</trunc> <pause dur="0.2"/> risk neutral universe <pause dur="0.9"/> to do the pricing <pause dur="0.7"/> so <trunc>th</trunc> <pause dur="0.4"/> all of the terminology <pause dur="0.3"/> is analogous <pause dur="0.9"/> in terms of <pause dur="0.7"/> valuing real option opportunities <pause dur="1.4"/> and there are <pause dur="0.7"/> in raising money <pause dur="0.2"/> i think that # <pause dur="1.1"/> companies <pause dur="1.3"/> do not really realize the value of the real options <vocal desc="laugh" iterated="n"/><pause dur="0.4"/> which might be available <pause dur="0.6"/> and that the stock market <pause dur="0.8"/> is <pause dur="0.6"/> only just becoming to realize <pause dur="0.6"/> that apart from the technology sector there are huge values in real options <pause dur="0.5"/> and as that goes through as the <pause dur="0.2"/> as the market realizes that then the share price will alter <vocal desc="laugh" iterated="n"/><pause dur="0.2"/> and then the companies will be able to raise more capital because they've

been able to convince the market that they've got some <pause dur="1.0"/> significant option value <pause dur="0.8"/> in <pause dur="1.3"/> their <pause dur="0.3"/> their asset stream and in their opportunity stream <pause dur="0.4"/> at the moment in this country <pause dur="0.7"/> # property companies are selling well below net asset value <pause dur="1.5"/> because people are simply not realizing the optionality <pause dur="0.4"/> which is available <pause dur="0.4"/> through the cash flows <pause dur="4.2"/><kinesic desc="changes slide" iterated="n"/> # the options <pause dur="0.7"/> are normally path dependent <pause dur="3.5"/> <reading>their value depends on some action taken in the past <pause dur="1.1"/> that impacts on future values</reading> <pause dur="2.3"/> so we can use <pause dur="1.3"/> the three models that you've been seeing <pause dur="0.4"/> through the term <pause dur="0.9"/> # Black Scholes <pause dur="0.4"/> # which is the least appropriate <pause dur="1.3"/> # because it it is difficult to adjust <pause dur="0.2"/> that for path dependency <pause dur="0.9"/> # the two <pause dur="0.2"/> the better <pause dur="0.3"/> opportunities are the binomial <pause dur="0.8"/> or <pause dur="0.3"/> simulation models <pause dur="0.8"/> the binomial you can alter <pause dur="0.7"/> at a node <pause dur="0.7"/> what might happen <pause dur="0.8"/> to <pause dur="0.7"/> an option value <pause dur="0.6"/> you have to be careful in <pause dur="0.2"/> the binomial <pause dur="1.3"/> because <pause dur="0.2"/> if you alter <pause dur="0.9"/> # the the volatility patterns <pause dur="0.5"/> the binomial will not recombine <pause dur="1.4"/> so instead of the tree going nicely up <pause dur="0.5"/> and coming back to where it first started <pause dur="1.0"/>

and then <pause dur="0.2"/> doing <pause dur="0.3"/> a similar <pause dur="0.2"/> thing as it goes through the tree <pause dur="0.6"/> if you have a <pause dur="0.4"/> a tree that doesn't combine <pause dur="0.9"/> then you start to have <pause dur="0.5"/> two-to-the-N nodes <pause dur="0.8"/> and when you get to something like two-to-the-eighth or two-to-the-tenth it's # <pause dur="0.2"/> it's something like a thousand-and-twenty-four nodes at the end <pause dur="1.1"/> which means that the tree becomes completely unmanageable <pause dur="0.7"/> if you start changing <pause dur="0.4"/> parameters <pause dur="0.5"/> and volatility patterns and other things at each node <pause dur="0.6"/> so the only reason that trees work <pause dur="0.8"/> or work nicely unless you do <pause dur="0.2"/> some very clever pruning <vocal desc="laugh" iterated="n"/><pause dur="0.3"/> of the trees is that they recombine <pause dur="1.0"/> and so <pause dur="0.3"/> a ten year tree just has <pause dur="0.6"/> ten nodes on it <pause dur="0.6"/> so the one we're going to be doing is simulation which is real easy <pause dur="0.9"/> to do because you can incorporate all sorts of path dependency <pause dur="1.2"/> into simulation models <pause dur="4.1"/><kinesic desc="changes slide" iterated="n"/> so i'm <pause dur="3.5"/> going to go through <pause dur="3.5"/> some stuff <pause dur="4.4"/> on options <pause dur="0.6"/> on real options <pause dur="1.4"/> that i've been <pause dur="0.4"/> working on <pause dur="0.3"/> with the Land Management department <pause dur="1.0"/> on <pause dur="0.9"/> trying to <pause dur="0.4"/> peel out some <pause dur="0.2"/> value <pause dur="0.9"/> in the company's real estate assets <pause dur="1.2"/> so that it can <pause dur="0.5"/> either <pause dur="1.1"/> spin those <pause dur="0.4"/>

real estate options out <pause dur="0.9"/> or it can convince the market <pause dur="0.5"/> that it's got more value in it and by convincing the market it can then <pause dur="0.6"/> hopefully get a better share price <pause dur="1.0"/> and then <pause dur="2.0"/> be able to do some sort of <pause dur="0.3"/> rights issue <pause dur="0.3"/> or other placement <pause dur="0.6"/> in terms of <pause dur="0.2"/> giving itself some added value <pause dur="1.4"/> so this is <pause dur="3.0"/><kinesic desc="changes slide" iterated="n"/> this is a problem with <pause dur="0.7"/> property <pause dur="0.4"/> a company's <pause dur="0.7"/> always <pause dur="0.4"/> have to have somewhere to live <pause dur="1.0"/> they've always got <pause dur="0.5"/> a lot of property <pause dur="0.4"/> on their balance sheets <pause dur="1.6"/> property is one of the most <pause dur="0.2"/> underutilized assets <pause dur="0.8"/> that a company has <pause dur="0.6"/> historically <pause dur="0.5"/> companies have only used property <pause dur="0.7"/> as <pause dur="0.8"/> a mortgageable asset <pause dur="1.2"/> which we did <pause dur="0.2"/><vocal desc="laugh" iterated="n"/><pause dur="0.4"/> in the workshop that we've just done <pause dur="0.7"/> that we mortgage seventy per cent at a fixed rate <pause dur="1.6"/> # <pause dur="0.6"/> very few companies use their asset base <pause dur="0.4"/> sufficiently to raise capital <pause dur="1.0"/> # mortgages can be <pause dur="0.2"/> quite expensive <pause dur="0.7"/> because of the valuation fees that are involved <pause dur="0.7"/> # <pause dur="0.2"/> because of the stamp duty <pause dur="0.3"/> which is involved as well <pause dur="0.7"/> and so there are other <pause dur="0.3"/> better ways <pause dur="0.2"/> # <pause dur="0.2"/> for a company to use its property portfolio <pause dur="0.8"/> than just <pause dur="1.4"/>

raising mortgage funds against it <pause dur="1.5"/> # <pause dur="0.2"/> there are problems with <pause dur="0.3"/> companies property portfolios <pause dur="0.3"/> firstly is the large size of each individual transaction <pause dur="1.4"/> # <pause dur="0.2"/> shares are nice <pause dur="0.6"/> you can <pause dur="0.2"/> take shares down into nice little bite size numbers <vocal desc="laughter" iterated="y" dur="1"/>and <pause dur="0.4"/> do a thousand <pause dur="0.2"/> or a hundred or whatever it might be <pause dur="0.8"/> very difficult <pause dur="0.5"/> on property because it's lumpy <pause dur="1.5"/> and it's <pause dur="0.4"/> hard to manage if you have to find a buyer for just a big lump of property <pause dur="0.5"/> it means that there are very few buyers around <pause dur="0.8"/> that can swallow up the property <pause dur="1.3"/> always <pause dur="1.2"/> government <pause dur="1.3"/> being government <pause dur="1.1"/> sees property as a wonderful source of revenue <pause dur="1.2"/> and so to move property <pause dur="1.1"/> you have to pay a huge amount of stamp duty <pause dur="1.2"/> just about anywhere <pause dur="1.2"/> and so this is <pause dur="0.5"/><vocal desc="laugh" iterated="n"/> except in the United States which didn't like stamp duties anyway <pause dur="0.4"/> <vocal desc="laughter" iterated="y" dur="1"/><shift feature="voice" new="laugh"/> but # this is one major source of revenue <pause dur="0.5"/> in a lot of <pause dur="0.2"/> countries <pause dur="0.3"/> is that if you do sell it you've

got to pay huge amount of transaction costs to do it <pause dur="0.5"/> so the transaction costs <pause dur="0.6"/> which you've discovered <pause dur="0.5"/> in the portfolio management just between the offer and bid <pause dur="1.3"/> are <pause dur="0.4"/> are exacerbated <pause dur="0.5"/> because in to move property in this market <pause dur="0.7"/> is six per cent front end transaction cost <pause dur="0.7"/> by the time you fold in all of the stamp duties <pause dur="0.4"/> so not only have you got the difference between the offer and the bid but you got to pay another six per cent <pause dur="0.7"/> to the government <pause dur="1.2"/> to move property <pause dur="2.7"/> it's also got a lot of <pause dur="0.2"/> valuation fees attached to it <pause dur="0.7"/> # <pause dur="0.5"/> the the property market <pause dur="0.6"/> for companies trying to raise money <pause dur="0.4"/> # <pause dur="0.5"/> is very <pause dur="0.3"/> very hard to get a fix on just <pause dur="0.3"/> what your property's worth <pause dur="1.2"/> and valuers <pause dur="0.5"/> smooth the series <pause dur="1.3"/> so what you've got is <pause dur="0.7"/> that valuers instead of doing their job properly <pause dur="0.3"/> look backwards and say well what sort of property was this when it was valued last time <pause dur="0.6"/> and so the whole of the <pause dur="0.2"/> the valuation parameter tends to be autoregressive <pause dur="0.7"/> and you find that it's an extremely smooth valuation

parameter and you actually don't ever get what the market is you can only get the market when you do a deal <pause dur="0.6"/> and there's no screen based property trading because it's not an homogenous asset <pause dur="0.4"/> so you're never quite sure what you've got <pause dur="2.1"/>

which is brings to <pause dur="0.5"/> incomplete market information that nobody really knows <pause dur="0.4"/> what their property's worth until they put it on <pause dur="0.9"/> the market <pause dur="1.2"/> and every property asset is complex and unique <pause dur="0.9"/> so while you may have a row of houses <pause dur="0.6"/> that comes on to the market that <pause dur="0.2"/> all looked the same when they started <pause dur="0.4"/> the moment people start to occupy them they're all different <pause dur="0.8"/> it's not like a share <pause dur="0.5"/> and it's not like a bond <pause dur="0.5"/> so the moment people start to <pause dur="0.4"/> paint their walls a different colour <pause dur="0.7"/> or put a new garage on <pause dur="0.6"/> it's a completely different asset <pause dur="0.3"/> so it's not homogenous <pause dur="0.9"/> so with <pause dur="0.2"/> with all of that <pause dur="0.2"/> you've got <pause dur="0.7"/> companies looking to raise money <pause dur="0.4"/> with this huge asset base <pause dur="0.5"/> which is extremely difficult to manage <pause dur="0.8"/> and extremely difficult to know <pause dur="0.6"/> what sort of valuation to put on <pause dur="4.3"/><kinesic desc="changes slide" iterated="n"/>

so what we've suggested <pause dur="0.9"/> in terms of doing this this is for large <pause dur="0.9"/> property companies <pause dur="0.9"/> is to create property derivatives <pause dur="2.5"/> and <pause dur="2.2"/> you can securitize <pause dur="1.5"/> an asset <pause dur="1.2"/> which means that you could <pause dur="0.5"/> theoretically take your property asset or any asset <pause dur="0.3"/> like <pause dur="0.4"/> # <pause dur="0.6"/> <trunc>ren</trunc> like # <pause dur="0.7"/> credit card <pause dur="0.6"/> # receivables <pause dur="0.2"/> or <pause dur="0.6"/> # mortgage pass throughs or a number of other things and securitize them <pause dur="0.5"/> and sell off little bits of it <pause dur="3.8"/> this isn't really appropriate for the property portfolio <pause dur="0.3"/> of a company because it then <pause dur="0.2"/> comes back into stamp duties and other <pause dur="1.1"/> # front end costs in terms of <pause dur="0.3"/> dividing up a property and making it into <pause dur="0.3"/> a trust for example with little bite size <pause dur="0.8"/> so what we thought is <pause dur="0.2"/> not to buy or sell the physical asset <pause dur="1.4"/> but buy sell <pause dur="0.3"/> and this is another thing or swap <pause dur="1.6"/> some of the rental cash flows which are derived from the physical asset <pause dur="1.1"/> so for example you've got <pause dur="0.4"/> a <pause dur="0.3"/> a company like <pause dur="0.5"/> # Marks and Spencer's <pause dur="0.3"/> here at the moment <pause dur="0.6"/> they're not having a very good time of it at all <pause dur="0.8"/> and they've just undergone a thing called a

huge sale leaseback <pause dur="0.5"/> arrangement <pause dur="0.7"/> # that's another way of raising money <pause dur="0.6"/> for companies is that you <pause dur="0.4"/> sell <pause dur="0.6"/> your physical assets <pause dur="0.5"/> and then for say twenty years you then lease them back <pause dur="0.8"/> from the institution or institutions that you've sold them so you get a whole big heap of cash flow now <pause dur="1.7"/> but <pause dur="0.2"/> you're <pause dur="0.5"/> hooked for a twenty year lease <pause dur="0.8"/> that <pause dur="0.5"/> involves <pause dur="0.7"/> huge front end costs again <pause dur="0.3"/> and it also means <pause dur="0.5"/> that by selling <pause dur="0.2"/> what is potentially <pause dur="0.3"/> your best real estate <pause dur="0.5"/> you lose the real option <pause dur="0.7"/> on the real estate <pause dur="0.2"/> and it's gone forever and it's been acquired by an institution <pause dur="0.9"/> so we're suggesting <pause dur="0.3"/> that <pause dur="0.2"/> instead of <pause dur="0.6"/> selling the asset <pause dur="0.9"/> that companies sell the cash flows <pause dur="1.3"/> and the cash flows are the derivative of the asset <pause dur="0.5"/> so we can value them using <pause dur="0.6"/> derivate pricing theory <pause dur="1.2"/> and also bond pricing methods <pause dur="4.5"/><kinesic desc="changes slide" iterated="n"/> so this <pause dur="0.2"/> is this is what we'll do in an option <pause dur="0.5"/> and a workshop <pause dur="0.4"/> in the first part of next term <pause dur="0.8"/> this is how you value all real options <pause dur="1.4"/> you <reading>model the expected performance <pause dur="0.5"/> of the underlying

property or asset <pause dur="0.8"/> in a form <pause dur="1.0"/> that allows you to assume risk neutrality</reading> <pause dur="1.0"/> it's very important <pause dur="0.3"/> that we get into this risk neutral universe <pause dur="1.0"/> 'cause if we do that then we could compare any property <pause dur="1.0"/> so if we're in a risk neutral universe <pause dur="0.2"/> every asset earns a risk free rate of interest <pause dur="0.4"/> and we can compare <pause dur="0.5"/> the value of any asset so we we have to move into a risk neutral universe <pause dur="4.3"/> we can take out the expected paths of <pause dur="0.2"/> any of the cash flows from the asset <pause dur="0.9"/> and account for any <pause dur="0.3"/> mean reversion <pause dur="1.0"/> in <pause dur="0.3"/> rental growth <pause dur="0.5"/> # <pause dur="0.5"/> series tend to <pause dur="1.1"/> cash flows tend to have <pause dur="0.4"/> a number of properties one of them is that they're mean reverting <pause dur="1.0"/> and you'll find this in an inflation series in a rental series that it tends to <pause dur="0.4"/> it tends to come and tends to revert to the mean <pause dur="0.5"/> so we can put a model in <pause dur="0.2"/> which actually <trunc>im</trunc> has a huge volatility pattern <pause dur="0.5"/> but a very nice mean reversion pattern <pause dur="1.0"/> and then we can discount <pause dur="0.2"/> the expected <pause dur="0.2"/> rent by the zero yield curve <pause dur="0.7"/> of the relevant market <pause dur="0.8"/> to <pause dur="0.5"/> also account <pause dur="0.3"/> for mean reversion

which could be in that series as well because <pause dur="0.8"/> yield curves also tend to be <pause dur="0.5"/> mean reverting so there's a lot of <pause dur="1.1"/> organizing that we can do on the inputs <pause dur="2.3"/><kinesic desc="changes slide" iterated="n"/> so <pause dur="0.2"/> you've seen this one before <pause dur="2.3"/> but this is what we've used <pause dur="0.4"/> for <pause dur="1.0"/> the <pause dur="0.4"/> the simulation <pause dur="0.2"/> part <pause dur="0.4"/> in <pause dur="0.5"/> the option project you're doing <pause dur="0.9"/> in the more complex model <pause dur="0.4"/> that i've <pause dur="0.3"/> just put on <pause dur="0.7"/> on the server <pause dur="0.9"/> this is done <pause dur="0.6"/> instead of one bullet option <pause dur="0.6"/> that we've done <pause dur="0.4"/> for your project <pause dur="0.3"/> I-E a seven year option or a ten year option <pause dur="0.4"/> this is done on an annual basis <pause dur="0.8"/> so <pause dur="0.2"/> if you want to use that file <pause dur="0.3"/> you can see that <pause dur="0.2"/> P-T then becomes P-T-plus-one T-plus-two T-plus-three <pause dur="0.5"/> as <pause dur="0.5"/> it simulates the binomial model <pause dur="0.8"/> going through time <pause dur="1.3"/> the only thing that you <pause dur="0.9"/> and we <pause dur="0.2"/> haven't <pause dur="1.1"/> discovered is <pause dur="0.3"/> this lambda <pause dur="0.9"/> here <pause dur="2.2"/> so in <pause dur="0.7"/> in a real options model <pause dur="1.8"/> we have to <pause dur="0.2"/> do an adjustment <pause dur="0.8"/> for risk <pause dur="0.8"/> because we can't assume <pause dur="0.9"/> that we can hedge <pause dur="0.5"/> a real estate portfolio properly <pause dur="0.2"/> by <pause dur="0.7"/> # <pause dur="0.3"/> shorting the option and buying delta <shift feature="voice" new="laugh"/> shares <shift feature="voice" new="normal"/><pause dur="0.8"/> or <pause dur="0.6"/> selling the put and selling delta shares <pause dur="0.4"/> 'cause it just doesn't work

out that way because we don't have a delta of a property <pause dur="0.8"/> 'cause we can't divide the property up into nice little <pause dur="0.5"/> bits of <shift feature="voice" new="laugh"/>property <shift feature="voice" new="normal"/><pause dur="0.4"/> in order to be able to hedge it properly <pause dur="1.0"/> but we can get round it <pause dur="1.8"/> by <pause dur="1.3"/> using <pause dur="0.6"/> a CAPM formula which i'll show you very shortly <pause dur="1.0"/> so in real options <pause dur="1.6"/> this mu <pause dur="2.0"/> is the expected growth rate <pause dur="0.8"/> of whatever it might be <pause dur="0.7"/> gold <pause dur="0.9"/> silver <pause dur="0.9"/> whatever <pause dur="0.4"/> you're looking at <pause dur="0.6"/> mu is the expected growth rate of the commodity of <pause dur="0.3"/> what's the underlying path of the real option <pause dur="0.9"/> it is not the risk free rate <pause dur="3.1"/> the <trunc>ad</trunc> the variance adjustment's exactly the same <pause dur="1.2"/> because <pause dur="0.5"/> while options can go up <pause dur="0.4"/> they most certainly can go down as well <pause dur="0.2"/> <vocal desc="laugh" iterated="n"/><pause dur="1.6"/> come to that in a minute <pause dur="1.4"/> and the rest of it <pause dur="0.5"/> is just the standardized <pause dur="0.7"/> log normal approach <pause dur="1.0"/> that we've been doing <pause dur="6.3"/><kinesic desc="changes slide" iterated="n"/> so you've seen this formula before many times <pause dur="0.2"/><vocal desc="cough" iterated="n"/><pause dur="0.9"/> right <pause dur="0.3"/> so it's a slightly different guise <pause dur="0.5"/> on this one <pause dur="2.2"/> so we're <pause dur="0.5"/> <trunc>thi</trunc> this is a property based one <pause dur="1.8"/>

where I is a suitable index <pause dur="1.4"/> and the suitable index would # <pause dur="0.5"/> be <pause dur="0.4"/> say the FTSE All Share <pause dur="1.5"/> right <pause dur="1.0"/> P is the property <pause dur="1.4"/> that you're looking at <pause dur="0.9"/> if we can <pause dur="0.7"/> tease out a beta <pause dur="0.4"/> between the index and the property <pause dur="1.4"/> over some <pause dur="0.2"/> period of time <pause dur="1.1"/> we could use <pause dur="0.4"/> P for property <pause dur="0.3"/> to resemble if it were that there are several subindices <pause dur="0.2"/> of property <pause dur="0.4"/> the same as there are several subindices of gold and silver and other bits and pieces <pause dur="1.1"/> and just simply use <pause dur="0.4"/> what we figure out <pause dur="0.3"/> the growth is <pause dur="0.8"/> less the risk free rate <pause dur="0.8"/> and if we take that <pause dur="1.1"/> off <pause dur="1.1"/> the top line <pause dur="0.9"/> of <pause dur="0.4"/> the formula above <pause dur="1.4"/> this one <pause dur="2.1"/> we come back into a risk free world <pause dur="1.7"/> and we can then <pause dur="1.3"/> discount <pause dur="0.8"/> the cash flows <pause dur="0.5"/> in that risk free world <pause dur="0.4"/> by the risk free rate <pause dur="0.7"/> so we're just doing <pause dur="0.6"/> what you've been doing all the time <pause dur="0.2"/> it's just a a CAPM adjustment <pause dur="0.6"/> to bring <pause dur="0.3"/> the whole thing back <pause dur="0.4"/> to risk neutrality <pause dur="2.1"/> which is extremely useful because it means you don't have to form the portfolio <pause dur="9.4"/><kinesic desc="changes slide" iterated="n"/> so if you've got this process <pause dur="1.1"/> for property or for gold or for silver or for whatever <pause dur="0.5"/> the real optionality

of it might be <pause dur="1.5"/> the <pause dur="0.4"/> the cash flows <pause dur="0.8"/> inherit the stochastic property <pause dur="0.6"/> properties <pause dur="0.4"/> of the underlying asset <pause dur="0.7"/> so all of the cash flows <pause dur="0.4"/> will be stochastic as well <pause dur="0.7"/> as the property moves around <pause dur="0.4"/> any cash flows <pause dur="0.5"/> which come from it <pause dur="0.2"/> will also tend to be stochastic <pause dur="1.1"/> we discount at the risk free <pause dur="1.4"/> rate <pause dur="1.3"/> now <pause dur="0.6"/> there are important parts going back to the property portfolio <pause dur="0.4"/> and this will depend on the market that you're in which i i'll come to shortly <pause dur="0.5"/> we can separate <pause dur="0.9"/> this property <pause dur="0.3"/> cash flow into fixed and variable characteristics <pause dur="1.4"/> and we can then analyse <pause dur="1.5"/> any of the characteristics <pause dur="0.2"/> of <pause dur="0.3"/> the cash flows <pause dur="0.9"/> to account for <pause dur="0.3"/> jump diffusion what's jump diffusion <pause dur="4.2"/> where are <pause dur="0.3"/> the mathematicians <pause dur="1.2"/> what's jump diffusion <pause dur="4.2"/><vocal desc="whistle" n="su0967" iterated="y" dur="1"/> <vocal desc="laughter" n="ss" iterated="y" dur="2"/> blinding silence <pause dur="3.8"/> it's what happens when a market falls out of bed completely <pause dur="1.3"/> so what you've <shift feature="voice" new="laugh"/># you've had a little bit here <vocal desc="laugh" iterated="n"/> right <shift feature="voice" new="normal"/><pause dur="0.4"/> that <pause dur="0.2"/> one of the the problems <pause dur="0.5"/> and it crashes as well <pause dur="0.6"/> one of the problems with a standard Black Scholes

methodology <pause dur="1.1"/> is that it assumes <pause dur="0.6"/> that <pause dur="0.7"/> markets <pause dur="0.3"/> go very nicely and very continuously <pause dur="0.9"/> they don't <pause dur="1.3"/> so what you've got is <pause dur="0.3"/> you can model <pause dur="0.5"/> into a process <pause dur="0.7"/> either a jump diffusion on volatility <pause dur="0.2"/> which means that volatility in a market suddenly changes <pause dur="0.6"/> and as you will have <pause dur="0.6"/> been with Dr Smith <pause dur="0.2"/> who has nice little volatility change regimes <pause dur="0.8"/> from time to time this has amazing impact <pause dur="0.3"/> on what happens with a market so you can model <pause dur="0.3"/> a process of <pause dur="0.5"/> volatility diffusion <pause dur="1.5"/> that it <pause dur="0.3"/> goes <pause dur="0.7"/> over <pause dur="0.3"/> a shortish period of time <pause dur="0.5"/> that <trunc>m</trunc> people's view on volatility <pause dur="0.4"/> say over a week suddenly changes <pause dur="0.3"/> and they assume that the market volatility is going <pause dur="0.4"/> up or down <pause dur="1.1"/>

# <pause dur="0.7"/> that's not as bad as a crash <pause dur="1.8"/> but you can also put a crash model in <pause dur="0.9"/> you can assume that # in the next ten years <pause dur="0.5"/> for example <pause dur="1.0"/> that <pause dur="0.5"/> the stock market or the gold market <pause dur="0.5"/> will crash by twenty per cent on a given day <pause dur="1.3"/> now you don't know when the day's going to be <pause dur="1.1"/> but you can <pause dur="0.2"/> probabilistically <pause dur="0.2"/> weight it <pause dur="0.6"/> so that at some stage <pause dur="0.3"/> through the next ten years <pause dur="0.4"/> there is going to be the most <pause dur="0.2"/> almighty crash <pause dur="1.2"/> that could happen in any market <pause dur="1.4"/> # as i say we can <pause dur="0.8"/> model for mean reverter yields <pause dur="0.2"/> and we can model for mean reverting interest rates <pause dur="0.6"/> so <pause dur="0.4"/> anybody that's looking at raising money <pause dur="0.2"/> on this sort of thing must <pause dur="0.5"/> model in <pause dur="0.5"/> the fact <pause dur="0.2"/> that <pause dur="0.6"/> markets fall and they fall very quickly <pause dur="1.2"/> they tend to rise rather slower <vocal desc="laugh" iterated="n"/><pause dur="0.5"/> so you can <pause dur="0.3"/> put all of this modelling in <pause dur="0.9"/> and # <pause dur="0.3"/> and get yourself <pause dur="0.4"/> quite an acceptable valuation <pause dur="0.6"/> in order to go out and get some

money <pause dur="2.8"/><kinesic desc="changes slide" iterated="n"/> # <pause dur="1.3"/> this is where <pause dur="1.1"/> in <pause dur="0.3"/> financial engineering terms and raising money you can get quite clever <pause dur="1.6"/> there <pause dur="0.4"/> there is a structure <pause dur="0.3"/> in this market <pause dur="0.5"/> and in a number of other markets <pause dur="0.6"/> which is called an upward only lease <pause dur="0.5"/> a lot of companies <pause dur="0.6"/> do this a lot of companies <pause dur="0.3"/> lease <pause dur="1.0"/> for a long period of time <pause dur="1.6"/> and they don't lease on what's called market rental <pause dur="0.4"/> that means their rents don't change every year <pause dur="1.1"/> as a function of open market <pause dur="0.6"/> their rents may change only once every five years <pause dur="1.5"/> and if the landlord can get away with it <pause dur="0.6"/> they only change <pause dur="0.2"/> upwards <pause dur="0.7"/> they never go down <pause dur="1.9"/> this is a <pause dur="0.2"/> an incredibly iniquitous form of lease <pause dur="1.0"/> but in a tight property market <pause dur="0.8"/> it sometimes happens <pause dur="0.7"/> that you can have <pause dur="0.4"/> upward only <pause dur="1.0"/> leases so if you have upward only leases <pause dur="0.8"/> the first part of a five year lease <pause dur="1.8"/> if it's a good credit <pause dur="0.7"/> is actually an annuity <pause dur="1.4"/> so what you've got is this company is paying twenty-five years' annuities <pause dur="0.7"/> to somebody <pause dur="1.1"/> 'cause it's paying <pause dur="0.7"/> at least that amount of lease rental <pause dur="1.3"/> for the next twenty-five years <pause dur="0.6"/> so

you can take these <pause dur="0.5"/> annuities <pause dur="0.9"/> package them up <pause dur="1.2"/> put a bank behind it <pause dur="0.4"/> and securitize them and sell them into the bond market <pause dur="1.9"/> if you're a good treasurer <pause dur="2.1"/> this <pause dur="0.2"/> what i've called second slice <trunc>th</trunc> <pause dur="0.2"/> these are five year <pause dur="1.0"/> this second slice is unknown <pause dur="1.8"/> so if it's unknown <pause dur="0.6"/> but it's high volatility <pause dur="0.6"/> it's an option <pause dur="1.9"/> so <pause dur="0.2"/> you can sell <pause dur="1.4"/> the next twenty years <pause dur="2.0"/> effectively convertible bond <vocal desc="laugh" iterated="n"/><pause dur="0.4"/> effectively an option <pause dur="0.5"/> for twenty years <pause dur="0.3"/> you can do the same with a green lot which is the third slice <pause dur="0.6"/> for the last fifteen years <pause dur="0.7"/> so by the time you've finished <pause dur="1.1"/> working out where your property's at <pause dur="0.8"/> you can have the physical property or the physical asset <pause dur="1.1"/> still keep it <pause dur="1.2"/> because that's the most valuable option <pause dur="0.3"/> in real option that you've got <pause dur="0.7"/> but you can sell <pause dur="0.7"/> all of the cash flows <pause dur="0.6"/> which are derived from the physical asset <pause dur="0.7"/> so by the time you <pause dur="0.2"/> can mix and match <pause dur="0.3"/> you've <pause dur="0.9"/> sold an annuity <pause dur="0.6"/> sold several slices of options <pause dur="0.2"/> and kept the property <pause dur="1.5"/> so a property in central

London or central New York or central wherever it might be <pause dur="0.5"/> even central Reading <pause dur="0.9"/> in twenty-five years time <pause dur="0.4"/> might be worth <pause dur="0.3"/> a whole heap of money <pause dur="0.8"/> so you're not giving it away which is what the Marks and Spencer's <pause dur="0.8"/> model was <pause dur="0.6"/> that you're actually giving away what's called the reversion <pause dur="0.4"/> in real estate speak <pause dur="0.8"/> you're giving away your most valuable option <pause dur="1.2"/> rather than <pause dur="1.2"/> being smart and using <pause dur="0.7"/> optionality <pause dur="0.5"/> to raise money <pause dur="1.0"/> to get your cash flows up <pause dur="5.9"/><kinesic desc="changes slide" iterated="n"/> so this sort of structure <pause dur="0.4"/> and any sort of structure <pause dur="0.4"/> based on <pause dur="1.2"/> real options <pause dur="1.6"/> tends to minimize <pause dur="0.5"/> legal fees <pause dur="1.3"/> # <pause dur="0.2"/> and valuation fees because you're not <pause dur="0.5"/> doing the whole of the asset we're just doing the rentals <pause dur="1.1"/> you can <pause dur="0.3"/> in property speak <pause dur="0.6"/> # the covenant <pause dur="0.6"/> is the company that is <pause dur="0.2"/> renting the property <pause dur="1.2"/> you can credit enhance <pause dur="1.0"/> we haven't covered <pause dur="1.0"/> enhancement <pause dur="1.1"/> but you can credit enhance so if it's a weak <pause dur="0.5"/> company <pause dur="0.8"/> you can go and find a bank <pause dur="1.3"/> that may have a relationship with <pause dur="0.2"/> this company's parent <pause dur="0.8"/> and may <pause dur="0.3"/> put a bank guarantee <pause dur="0.9"/> behind <pause dur="0.5"/> the payment

of the cash flows <pause dur="1.5"/> and <pause dur="0.4"/> enable it to be sold into a different market which is the <pause dur="0.9"/> securitization market <pause dur="1.2"/> so you can then <pause dur="0.3"/> parcel up all of these little cash flows on gold or silver or property or whatever it might be <pause dur="1.3"/> break them down into bite size chunks <pause dur="1.0"/> enhance them so it's # instead of it being # <gap reason="name" extent="2 words"/> Enterprises Credit it's Deutsche Bank and presumably Deutsche Bank is a bit <pause dur="0.2"/> better credit than i am <pause dur="1.0"/> and then <pause dur="0.6"/> sell that as a Deutsche Bank piece of paper into the market <pause dur="0.6"/> if you can do that <pause dur="1.7"/> what it means is <pause dur="0.3"/> that <pause dur="0.4"/> you never part with the asset <pause dur="0.6"/> and you're using <pause dur="0.2"/> other <pause dur="0.3"/> parts of the capital market <pause dur="0.7"/> to reveal <pause dur="1.1"/> the real optionality <pause dur="0.7"/> that is in <pause dur="0.9"/> your company's assets <pause dur="0.8"/> and the ones that we've looked at <pause dur="1.1"/> the sum of the parts <pause dur="0.3"/> greatly exceeds <pause dur="0.9"/> the total <pause dur="1.1"/> that when you <pause dur="1.1"/> use the real options <pause dur="0.4"/> and peel them out <pause dur="0.9"/> that <pause dur="0.4"/> what has been <pause dur="0.6"/> the passive <pause dur="1.1"/> net present value as we did in the workshops <pause dur="0.6"/> is far far less <pause dur="0.8"/> than the optionality <pause dur="0.2"/> of the cash flows <pause dur="0.3"/> properly engineered <pause dur="0.6"/> and properly put through <pause dur="0.5"/>

into the capital market <pause dur="1.1"/> now <pause dur="0.8"/> one thing that <pause dur="1.0"/> you can do and this is just <pause dur="0.2"/> from <pause dur="0.6"/> the investment regime <pause dur="0.8"/> just as an investor <pause dur="0.9"/> that if i'm Long Reading Property <pause dur="1.2"/> and # <pause dur="2.3"/> <gap reason="name" extent="1 word"/> is Long Birmingham Property <pause dur="1.6"/> then <pause dur="1.2"/> maybe i'm a Little Too Long South of England Property <pause dur="1.2"/> and <pause dur="0.3"/> # i'm <pause dur="0.4"/> not really happy with the economic characteristics of <pause dur="0.5"/> the south of England i'm too long <pause dur="0.6"/> and he's Too Long Midlands <pause dur="0.6"/> Property <pause dur="0.9"/> so we could actually swap <pause dur="1.1"/> our property exposure <pause dur="0.7"/> for a while <pause dur="1.1"/> so <pause dur="0.6"/> <gap reason="name" extent="1 word"/> could sell me <pause dur="0.7"/> his <pause dur="1.5"/> next ten years Birmingham rents <pause dur="1.1"/> and i could <pause dur="0.2"/> <trunc>s</trunc> sell him my next ten years' Reading rents <pause dur="0.7"/> so instead of <trunc>s</trunc> instead of us both going into a transaction <pause dur="0.4"/> where we have to sell the property <pause dur="0.5"/> we could go into a transaction where we forward sell the cash flows <pause dur="0.8"/> from the property <pause dur="0.5"/> so then <pause dur="0.2"/> # my a hundred-million Reading cash flows will go to him <pause dur="0.7"/> and <trunc>i</trunc> # <pause dur="0.2"/> well in <pause dur="0.2"/> net terms # <pause dur="0.2"/> and his will come back to me <pause dur="0.4"/> and at the end of the process <pause dur="0.3"/> like in the swaps market <pause dur="0.5"/> we simply net out the difference of the cash flows <pause dur="1.1"/>

so that # <gap reason="name" extent="1 word"/> may win <pause dur="1.0"/> because <pause dur="0.2"/><shift feature="voice" new="laugh"/> you know he's bought my Reading properties <pause dur="0.2"/> and he's made a good deal <shift feature="voice" new="normal"/><pause dur="0.7"/> but i might win on the other hand but we don't swap the gross <pause dur="1.3"/> cash <pause dur="0.3"/> we swap the net cash <pause dur="0.2"/> at the end <pause dur="0.9"/> on ongoing basis <pause dur="0.6"/> so it's a very <pause dur="0.3"/> useful area looking at it from the investor rather than the company that's trying to raise money <pause dur="0.8"/> that # i can diversify out of <pause dur="1.1"/> a market here <pause dur="0.5"/> into <pause dur="0.3"/> another market <pause dur="0.9"/> # which <pause dur="0.7"/> # might enhance <pause dur="0.5"/> yeah my overall <pause dur="0.3"/> diversification potential <pause dur="9.2"/><kinesic desc="changes slide" iterated="n"/> there's a couple of the markets which i've gone through <pause dur="0.7"/> which <pause dur="0.6"/> # <pause dur="0.6"/> which might <pause dur="1.3"/> want to use their assets <pause dur="0.6"/> certainly companies <pause dur="0.3"/> when they are raising money do not use <pause dur="0.7"/> their property assets <pause dur="0.4"/> properly <pause dur="0.5"/> Marks and Spencer's is the latest classic <pause dur="0.5"/> why sell its best properties <pause dur="0.6"/> into the market <pause dur="0.8"/> and then rent them back <pause dur="0.9"/> and give a buyer a Marks and Spencer's credit

which is still extremely good <pause dur="0.6"/> is entirely beyond me <pause dur="0.9"/> as to all they should have done is to securitize the cash flows <pause dur="0.8"/> sell the cash flows into the <shift feature="voice" new="laugh"/>market <shift feature="voice" new="normal"/><pause dur="0.6"/> and keep the property <pause dur="0.7"/> so there's a lot <pause dur="0.9"/> the message from the day is <pause dur="0.8"/> there's a lot of hidden value <pause dur="1.1"/> in <pause dur="0.2"/> all of these asset classes <pause dur="0.9"/> particularly in <pause dur="0.6"/> the <trunc>propert</trunc> <pause dur="0.3"/> the property <pause dur="0.4"/> portfolio <pause dur="0.8"/> of <pause dur="0.3"/> the company <pause dur="0.9"/> okay <pause dur="0.6"/> so that's <pause dur="0.3"/> that's a first look <pause dur="0.6"/> at <pause dur="0.5"/> real assets <pause dur="0.4"/> sorry real options <pause dur="1.0"/> # <pause dur="0.9"/> one modelling <pause dur="0.2"/> session <pause dur="1.0"/> next term <pause dur="0.3"/> where i'll show you these <pause dur="0.5"/> and i <pause dur="0.3"/> show you the models <pause dur="0.4"/> for deferring abandonment <pause dur="0.3"/> they're actually reasonably simple <pause dur="0.6"/> in terms of <pause dur="0.5"/> getting out the <pause dur="0.3"/> the cash flows <pause dur="0.7"/> getting them through <pause dur="0.9"/> so <pause dur="0.7"/> that'll do us <pause dur="0.5"/> for today i'm going to be around until eleven <pause dur="1.2"/> i know people want <pause dur="0.5"/> to talk about projects <pause dur="0.4"/> so i've got a meeting at eleven until twelve <pause dur="0.8"/> and we'll <pause dur="0.3"/> pick up any other meetings <pause dur="0.4"/> next week <pause dur="1.1"/> okay

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