Cost Versus Flexibility of Different Capacity Leasing Approaches on the Optical Network Layer

This paper discusses different capacity leasing scenarios for the optical network. It aims at providing systematic understanding of cost structure of optical networks, without focusing on technical details. It reviews different kinds of capacity leasing approaches discussing the relative costs and the flexibility associated to them to adapt to future traffic needs. Then it applies the Real Options principles to evaluate the most convenient planning solution. Real Option valuation is shown to be the formalization of the natural way of valuating different alternatives under uncertainty, taking into account that information becoming available during the course of the planning horizon might influence the strategy followed. The goal of the paper is to give insight in the practical applicability of the technique for the network operator.