Abstract Technological innovations often create new markets and this gives incentives to learn about their associated profitabilities. However, decision depends not only on the underlying uncertain profitability, but also attitudes towards risk. We develop a decision-support tool that accounts for impact of learning potentially risk-averse maker. The Kalman filter is applied derive time-varying...

A real option on a commodity is valued using an implied binomial tree (IBT) calibrated using commodity futures options prices. Estimating an IBT in the absence of spot options (the norm for commodities) allows real option models to be calibrated for the first time to market-implied probability distributions for commodity prices. Also, the existence of long-dated futures options means that good ...

This paper develops a framework to link the expected utility analysis to real options models in order to capture the joint effects of risk aversion and irreversibility associated with real investments. It aims at modifying the theory of investment under uncertainty by incorporating decision makers’ risk preferences and allows explicitly analyzing the impacts of risk aversion, uncertainty and ir...

In this paper we shall represent strategic planning problems by dynamic decison trees, in which the nodes are projects that can be deferred or postponed for a certain period of time. Using the theory of real options we shall identify the optimal path of the tree, i.e. the path with the biggest real option value in the end of the planning period.

Information-communication technology (ICT) investments analysis using real options (ROs) has been a subject of active research during the last decade. It is a flexible method to value investment opportunities and to derive optimal timing of investments deployment taking into account uncertainties in future benefits and costs. We develop a framework for classifying the research on real ICT proje...

Revenue management is the process of actively managing inventory or capacity to maximize revenues. The active management typically occurs through managerial levers such as price, promotion or availability. We present a novel real options approach to revenue management that is specifically suited to the car rental business. We illustrate the concept with actual car rental data. The model produce...

Real options modeling, which extends the ability of option pricing models to evaluate real assets, can be used to evaluate risky projects because of its capacity to handle uncertainties. This research utilizes possibility theory to represent private risks of a project, which are not reflected in the market and hence are not fully evaluated by standard option pricing models. Using a transformati...

The concept of real options initiated in the field of finance has extended into engineering systems to model design flexibility in the realistically uncertain environment. However, whereas financial options are well-defined traded contracts, real options “in” engineering systems are a priori undefined, complex, and interdependent. Moreover, systems involve many more options than designers could...