This survey paper provides an overview of real options, in particular the connection with financial options, valuation methods (analytical methods vs numerical methods based on simulation, lattice approximations to stochastic processes and finite-difference methods) and a wide array of application areas, from R&D to operations management to renewable energy project selection. 1 Real Options vs ...

I introduce a strategic seller to a standard model of real options. A privately informed seller, such as a startup, tries to court a forward-looking buyer, such as a venture capitalist. The buyer learns gradually about the seller’s quality, high or low, through exogenous news and can “adopt” the seller at any time. The seller pays a flow cost but can exit or privately upgrade its quality at any...

By adopting a real options framework, we develop and analyze a production based valuation model that jointly incorporates process and market risks. Given this setting, techniques of contingent claims analysis and stochastic control theory are employed to obtain value maximizing operating policies in a constrained capacity environment. In our analysis, adjustments to operating policies are analo...

This paper revisits Williams (1997) on the effect of net rental price, asset quality and variable investment costs on the asset redevelopment decision. This paper develops a quasi-analytical method for solving the generalised real renovation option problem by treating the investment cost as having both a variable and a fixed element and then extends the analysis for the case where both the net ...

An outline of objectives Commercial enterprises are considered moving for maximizing their expected payoff. Traditional Net Present Value (NPV) method is one of the measures of investment decision. But static NPV method has its limits, since there is a lot of uncertainty in business situations so that actual profit includes a lot of risk. Intuitively, one can see that more alternatives that can...

implementing information technology projects requires a calculated process to prevent failure. at the same time application of information technology in organizations faces various potential risks. exploring information technology environment in organizations reveals the potential risks and provides a structure for comprehensive risk management. there are various methods available for risk mana...

Most investment decisions present the following three characteristics: • Irreversibility: The investment is partially or completely sunk, i.e. it cannot be recovered. • Uncertainty: The best that can be done is to assess the probabilities of the alternative outcomes that can imply larger or smaller profits. • Timing: The decision can be postponed in order to get more information (but never comp...

We study partnership contracts under uncertainty but with clauses that admit downstream flexibility. The focus is on effects of flexibility on the synergy set, the core, of the contract. In a partnership context the value of flexibility is captured by the partners who own the right to exercise. On one side, there are cooperative options, which are exercised jointly and in the interest of maximi...

Most firms do not make explicit use of real option techniques in evaluating investments. Nevertheless, real option considerations can be a significant component of value, and firms which approximately take them into account should outperform firms which do not. This paper asks whether the use of seemingly arbitrary investment criteria, such as hurdle rates and profitability indexes, can proxy f...