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Facility requirements determine how and when the capacity of airport passenger terminal facilities is adjusted over time to meet expected demand. Given high levels of uncertainty inherent in long-term airport planning, under and over provision of capacity is a recurrent risk, as conventional strategic planning methods fail to adapt dynamically to changing circumstances. This paper introduces a novel flexible capacity expansion model for airport terminals that considers simultaneously real options ‘on’ and ‘in’ systems. The model is validated for the provision of check-in facilities at Zurich Airport. Results confirm suggestions in the literature that incorporating flexibility creates planning and financial advantages over conventional alternatives. Indeed, for the case of Zurich, the financial value of the flexible alternative is approximately 5% higher than the best conventional phased plan. This also suggests that phasing developments can be carefully devised to produce satisfactory outcomes that enable ex-post application of flexibility ‘on’ systems.

La tesi si compone di due progetti indipendenti. Il primo utilizza la metodologia real options per l'analisi delle politiche per lo sviliuppo di nuovi impianti rinnovabili. Propongo uno schema a sussidi crescenti nel tempo ed un price cap, di modo da aumetare la velocità di sviluppo di nuova capacità di produzione e contenere la spesa. Il secondo paper invece rappresenta il comportamento anticompetitivo di un'impresa digitale, un intermediario di dati, che estrae informazioni dai consumatori ed in seguito le alloca startegicamente presso le imprese, consentendo loro di offrire prezzi personalizzati. Inoltre l'intermediario riesce a sfruttare gli effetti di scala tipici delle tecnologie di produzione dei dati, per consolidare la sua posizione monopolistica., The thesis consists of two independent projects. The first uses the real options methodology for the analysis of policies for the development of new renewable plants. I propose a subsidy scheme that increases over time and a price cap, in order to increase the speed of the development of new production capacity and contain spending. The second paper, on the other hand, represents the anti-competitive behavior of a digital company, a data intermediary, which extracts information from consumers and subsequently allocates it strategically to product firms, allowing them to offer personalized prices. Furthermore, the intermediary is able to exploit the scale effects, typical of data production technologies, to consolidate its monopolistic position.

Energy sources and commodities exhibit high price risk. This risk is thus an important feature of operational models of the value chains for these goods. These models typically employ Gaussian-based representations of the evolution of this uncertainty. This approach facilitates the optimization of operational policies but is at odds with empirical facts about energy and commodity prices, which are better captured by non-Gaussian processes. We discuss this alternative modeling strategy, focusing on Lévy processes. As an illustration, we show that it substantially increases the optimal policy value in a simplified merchant natural gas storage setting. Further, we highlight potential implications of using this approach to formulate realistic energy and commodity operations models. Our work has broader relevance for modeling the dynamics of both other market variables and operational quantities, such as exchange rates and demand forecasts. The study of how the adoption of non-Gaussian processes may impact energy and commodity operations is an appealing area for future research.

Having children is like investing in a risky project. Postponing birth is like delaying an irreversible investment. It has an option value, which depends on its costs and benefits, and in particular on the additional risks motherhood brings. We develop a parsimonious theory of childbearing postponement along these lines. We derive its implications for asset accumulation, income, optimal age at first birth, and childlessness. The structural parameters are estimated by matching the predictions of the model to data from the National Longitudinal Survey of Youth NLSY79. The uncertainty surrounding income growth is shown to increase with childbearing, and this increase is stronger for more educated people. This effect alone can explain why the age at first birth and the childlessness rate both increase with education. We use the model to simulate two hypothetical policies. Providing free medically assisted reproduction technology does not affect the age at first birth much, but lowers the childlessness rate. Insuring mothers against income risk is powerful in lowering the age at first birth.

Waste-to-energy technologies start to gain the attention of developing countries as a sustainable energy source in response to the worsening municipal solid waste management problem. This paper proposes an investment model to analyze the economic feasibility of waste-to-energy projects in developing countries using the Philippines as a case study. Applying the real options approach under uncertainty, we compare the option values, the value of waiting, and the optimal timing of switching technologies from landfill to waste-to-energy. Considering the energy production and investment costs, the optimization results find that incineration, with an optimal electricity price of USD 3cents/KWH, is the best technology option followed by gasification and pyrolysis at USD 7cents/KWH and USD 12cents/KWH, respectively. At the current price of electricity of USD 11cents/KWH, it is more optimal to postpone investment in pyrolysis, otherwise, the tipping should be increased from USD 15/ton to USD 18.5/ton to make pyrolysis a more viable option than continue using the landfill. On the other hand, it is a more optimal decision to invest immediately in either incineration or gasification as delaying investment incurs opportunity losses from generating electricity from these technologies. Furthermore, the paper suggests that the government must support waste-to-energy program as it will significantly contribute in solving the problems on the environment particularly air quality and waste management as well as on energy security and sustainability.

I investigate the optimal investment timing model in which investment is feasible in only one of the two regimes, which shift at Poisson jump times. I derive the option value and investment threshold in closed forms. I also prove that some solutions in previous models are obtained as the limits of the solution. The closed-form solution can be useful as a new framework to study real option problems with the illiquidity of option exercise opportunities.

Hydrogen has emerged as a possible transportation fuel for addressing long-term, sustainable energy supply, security, and environmental problems. The transition from fossil-fuel based energy consumption towards sustainable energy solutions is a complex societal process. The innovation process for any emerging technology like hydrogen fuel cell technology is usually characterized as complex, with high R&D costs and encompassing high degrees of uncertainties regarding the future of the technology and the diffusion into markets. Hydrogen fuel cells have a high potential in the long run, but they are currently surrounded by many uncertainties. It is generally believed that the transition to hydrogen-powered transportation mainly faces challenges and uncertainties from market, technical and policy aspects. Market barriers include building a supporting fuel infrastructure, creating a market for new and unfamiliar vehicles, and achieving economies of scale in vehicle production while providing an attractive selection of vehicle models for car-buyers. Whether potential customers will accept the products or whether public users such as transportation companies are willing to procure hydrogen vehicles, still remains unknown. Moreover, technical uncertainty is also important.It relates to uncertainty of the technology and how it will develop, of crucial technological barriers and possibilities to solve them. Last but not the least, policy uncertainty is a crucial factor too. The position and attitude of public decision makers and the predictability and consistency of policy measures like subsidies, tax-breaks, regulatory requirements and the public procurement of vehicles and energy services are crucial to the deployment of hydrogen fuel cell technology into society. In this thesis, I aim to apply real options theory to model uncertainties perceived by potential investors connected to the transition process towards a hydrogen infrastructure. I will develop a collection of

Purpose: This paper examined the application of real option analysis to real estate development (RED) appraisal in an emerging African market. It examined the effects of flexibility types on RED appraisal outcomes and compared the appraisal outputs with results obtained from the traditional NPV model. Design/methods: Using data of four case studies; three commercial and one residential property development, the study compared the results of the traditional NPV appraisal outputs under three scenarios of most optimistic, most likely and most pessimistic against the results obtained from the real option analysis using the Samuelson McKean Formula. The options examined were the option to delay/defer and vertically expand development. Findings: The results showed that the use of the DCF (NPV) traditional model favours a stable and optimistic market; with positive trends and forecast. Thus, during unanticipated market downturns, investors might be exposed to the greater level of downside risk when RED investments are appraised based on the traditional models only. This implies the needs to encourage the adoption of the real option models which guarantee better appraisal of RED investment even during the period of unexpected market downturns. Practical Implication: Based on evidences from an emerging market, the paper gives a further insight on the adoption real option analysis in RED appraisal in comparison with outputs obtained from the traditional DCF appraisal models. Originality: The paper is one of the few attempts that seek to demonstrate the practical application of real option analysis in practice, particularly from an emerging African market.

Demand for the construction of retirement villages is increasing with the worldwide growth in ageing populations. However, the development of retirement villages can be impeded by many factors, such as limited available land and high investment costs. Public–private partnership (PPP) as an alternative financing mechanism has been widely applied in the construction of public infrastructure projects and may provide new funding sources for building retirement villages. By applying PPP to the construction of retirement villages, the independent living requirements of seniors can be met and the financial difficulty of the construction of retirement villages can be resolved. Similar to other PPP projects, when retirement villages are constructed under a PPP process, the concession period is a key decision variable in relation to the success of the project. The concession period is stated in the project contract between the government and private investors, and stipulates the date when the project ownership and operation are transferred from the private investor back to the government. The government should take detailed information into consideration at the initial project stage when determining the concession period. This paper proposes PPP as a new procurement method to be applied to the construction of rental retirement villages and develops a concession period determination process for PPP retirement village projects with consideration of real options, focusing on the option to defer. An empirical example with alternative scales, which is developed from an existing retirement village in Geelong, Australia, is used to numerically verify the process and the impacts of key variables on the concession period. The determination process provides an alternative tool for governments to design the concession period before the tendering stage and will benefit the development of industries associated with services for the ageing population. This process can also be applied

PURPOSE: This paper gives a global overview of the management of uncertainty in Real Estate Development (RED) appraisal. It provides a comprehensive review of the concepts related to forms and sources of uncertainty, management of uncertainty and factors influencing the adoption of real option model in RED appraisal. This is against the background of the need to improve the knowledge of stakeholders in RED appraisal practice and to ensure best practices. DESIGN/METHODS: The research was based on desktop analysis of past authors’ perspectives, orientations and submissions on the management of uncertainty in RED appraisal. FINDINGS: As it is expected, there are varying forms and sources of uncertainty in RED appraisal. Also, the review revealed diverse methods that could be used to manage uncertainty in RED appraisal. These range broadly from traditional approaches to modern/contemporary models such as real option approaches. It is however noted that while approaches to the management of uncertainty in RED appraisal abound, the methods employed appear to be dependent on the RED appraiser and other institutional factors. The consensus from the reviewed works favoured the real option model as a better approach towards mitigating uncertainty in RED appraisal. A framework that uses real option model in RED appraisal is thus advocated. PRACTICAL IMPLICATION: This paper adds to the debate on the need to embrace real option framework in mitigating the effects of uncertainty in RED appraisal. The information provided, no doubt, will improve the knowledge of stakeholders in RED appraisal practice and could ensure best practices. ORIGINALITY: The paper provides an in-depth examination of various concepts, perspectives and orientations on the management of uncertainty in RED appraisal, towards the adoption of a better framework.

Having children is like investing in a risky project. Postponing birth is like delaying an irreversible investment. It has an option value, which depends on its costs and benefits, and in particular on the additional risks motherhood brings. We develop a parsimonious theory of childbearing postponement along these lines. We derive its implications for asset accumulation, income, optimal age at first birth, and childlessness. The structural parameters are estimated by matching the predictions of the model to data from the National Longitudinal Survey of Youth NLSY79. The uncertainty surrounding income growth is shown to increase with childbearing, and this increase is stronger for more educated people. This effect alone can explain why the age at first birth and the childlessness rate both increase with education. We use the model to simulate two hypothetical policies. Providing free medically assisted reproduction technology does not affect the age at first birth much, but lowers the childlessness rate. Insuring mothers against income risk is powerful in lowering the age at first birth.

In this article, we perform an empirical investigation of the effect of the interest rate uncertainty on the valuation of investment projects. The analysis is carried out by employing a real option approach and by considering a set of firms that operate in various production sectors in the euro area. In particular, the revenues generated by the investment projects are modelled using a geometric Brownian motion, whereas the interest rate is specified as a stochastic process of Vasicek type. Moreover, using the volatility of the equity return as a proxy, the volatility of the revenues is calibrated to real firm data, while the parameters of the interest rate model are estimated by fitting the Euribor time series. To this aim, an ad hoc calibration procedure is developed which is based on the maximum likelihood principle and thus has the merit of being simple, fast and suitable for practical purposes. Our study reveals that the interest rate uncertainty reduces the valuation of investment projects. However, stochastic interest rates do not provide a substantial improvement with respect to constant interest rates, or at least the differences are not statistically significant.

В статье анализируется возможность повышения эффективности инновационных проектов за счет применения опционного подхода. Представлены результаты исследования отношения населения к рискам, инновациям, оценке инновационных проектов. Выявлена закономерность между высокими маркетинговыми и организационными рисками проектов, реализуемыми российскими предприятиями, и низким удельным весом маркетинговых и организационных инноваций в России. Продемонстрированы результаты., The article analyzes the possibility of increasing the efficiency of innovative projects through the use of optional approach. Presents results of a study of attitudes toward risk, innovation, evaluation of innovation projects. The regularities between institutional marketing, and high risk of projects implemented by Russian enterprises, and low specific gravity marketing and organisational innovations in Russia. Demonstrated the evaluation results of an innovative project using a variety of approaches: rapid assessment, detailed classical analysis, optional approach.

V současné ekonomice musí manažeři firem reagovat na rychle se měnící podmínky okolí. Ukazuje se, že klasické výnosové metody hodnocení projektů selhávají, neboť nemohou zahrnout flexibilitu rozhodování do hodnoty, tím je projekt podceněn a následně může být pro zdánlivě jasnou ztrátovost zamítnut. Cílem příspěvku je popsat aplikaci klasické výnosové metody při zohlednění budoucích možných rozhodnutí, která je obecně označována jako reálná opce., In this economy, the managers must respond to rapidly changing environmental conditions. In turns out that classical yield methods for projects evaluation fail because of inability to include flexibilty in decison making into the the value.The project is understimated and can be rejected for seemingly clear loss. The aim of the paper is to describe the appliaction of classical yield method, taking possible future decisions into account (generally known as a real option).

This thesis looks at the value of having the option to buy gas on the world Liquified Natural Gas-market rather than just relying on one distributor via pipeline. The world market for natural gas is characterized by rigid distribution methods and there is no short term flexibility of destination for the seller and almost no possibility for buyers to buy gas on a competitive market. The investment is evaluated using real option analysis. The computational method for the valuation is Monte Carlo simulations and pipeline gas prices and Liquid Natural Gas prices will be modelled through stochastic modelling and the prices are assumed to be characterized by mean reversion and price convergence. The model will be developed following Yepes Rodríguez (2008) model of natural gas price progression. The main conclusion is that he value of investing in a regasification facility is found to be positive and that LNG regasification facilities a financially viable investments to diversify natural gas markets.

This study addresses irreversible investment decision-making in the context of uncertainty when allowing for inefficiency to be transmitted over time. Both irreversibility and persistence in technical inefficiency can lead to sluggish adjustment of quasifixed factors of production. The context of our application is the Spanish olive sector using farm-level data. We first estimate a dynamic stochastic frontier model to determine the long-run technical efficiency and its persistence. Then we address the decision to invest under uncertainty and irreversibility using a real option approach and include the technical inefficiency and its persistence in the simulation model to evaluate their impact in the investment decision. Technical efficiency in the dynamic model is 72.7 per cent, which is 5.5 per cent lower than the static framework suggests. We find that olive grove investment is irreversible. However, the level of persistence in technical inefficiency is fairly low, suggesting that efforts to mitigate price uncertainty can improve production returns to the Spanish olive sector., Postprint (published version)

The aim of this study is to assess whether the value of flexibility can influence the investment decision between CO2 ship and pipeline transport and, therefore, the way the infrastructure develops. For this, the value of a carbon capture and storage project are calculated with the standard net present value (NPV) and with the least-squares Monte Carlo method, which is a real option approach (ROA).Results of the NPV and ROA show that ships are preferred for small volumes over large distances. For instance, for a design capacity of 2.5Mt/y, pipelines are preferred for 250km and ships for 500km. The ROA shows that the option value to abandon the project and to switch off the CO2 capture unit temporarily are about 2-4 and 5 times as high for the ship compared to the pipeline configurations, respectively. The option to connect to another storage reservoir has a value of >1000M€ for the 10MtCO2/y configurations. Consequently, this option turns the project values positive for the 10MtCO2/y pipeline and shipping configurations over a distance of 250 and 500km.Overall, the value of flexibility did not change the preferred transportation mode from pipeline to ship transport, at least for the considered options to abandon the project, switch off the capture unit temporarily and switch to another storage reservoir. However, under the assumptions made, all 10MtCO2/y cases were not profitable with the NPV approach, while they were profitable with the ROA.

Purpose: The goal of this paper is to find the best production strategy for product portfolio, which means the largest value of the options. And finally, give a case and find the solution of the optimal production strategy for product portfolio. Design/methodology/approach: This article, based on the production with characteristics of a call option and 0-1 integer programming model, build new-product portfolio strategy, and through case demonstrate that traditional method underestimates the value of the product portfolio. Finding: According to market being volatility and uncertainty and the production can being delayed, firms can flexibly arrange the best time for products to manufacture. Use real options theory to analyze product decision and the best production timing decision. Find the total options value is higher than the traditional methods. Research limitations/implications: We are not applied to real option pricing theory in modular flexible production system. We just applied real option pricing theory to the product platform. The basic model need to improve. While the thinking of this paper provides some research ideas for flexible production systems based on real option in further research., Peer Reviewed

We study the nonstandard optimal exercise policy associated with relevant capital investment options and with the prepayment option of widespread collateralized-borrowing contracts like the gold loan. Option exercise is optimally postponed not only when moneyness is insufficient, but also when it is excessive. We extend the classical optimal exercise properties for American options. Early exercise of an American call with a negative underlying payout rate can occur if the option is moderately in the money. We fully characterize the existence, the monotonicity, the continuity, the limits, and the asymptotic behavior at maturity of the double free boundary that separates the exercise region from the double continuation region. We find that the finite-maturity nonstandard policy conspicuously differs from the infinite-maturity one.

We study the nonstandard optimal exercise policy associated with relevant capital investment options and with the prepayment option of widespread collateralized-borrowing contracts like the gold loan. Option exercise is optimally postponed not only when moneyness is insufficient, but also when it is excessive. We extend the classical optimal exercise properties for American options. Early exercise of an American call with a negative underlying payout rate can occur if the option is moderately in the money. We fully characterize the existence, the monotonicity, the continuity, the limits, and the asymptotic behavior at maturity of the double free boundary that separates the exercise region from the double continuation region. We find that the finite-maturity nonstandard policy conspicuously differs from the infinite-maturity one.

In this paper, we contribute to the literature by including a knock-out barrier option in a compound real option model to take account of immediate project failure, a so-called sudden death. We apply the model to the case of hydrogen infrastructure development. In our case study, we find that even for the least conservative valuation method no profitable business case can be made for the development of hydrogen as a sustainable transportation mode. However, we do provide some suggestive scenarios that plausible tax schedules can be designed to overcome the starting problems for hydrogen infrastructure development. To the extent that sudden project failure would be predominantly caused by potential reversals in political support, a cheap way to make the development of hydrogen infrastructure – and other similar projects - more attractive would be to design credible long-term political commitments to this type of development.

В статье обоснована определяющая роль редкоземельных металлов (РЗМ) как основы для создания высокотехнологичной продукции. Разработан методологический подход к оценке эффективности производства высокотехнологичных материалов на основе РЗМ, учитывающий их специфические особенности. В работе предложены алгоритмы построения экономико-математической модели формирования оптимального плана производства и проведения оценки эффективности с использованием метода реальных опционов. Выработано понятие реального опциона в сфере производства легирующих добавок на основе РЗМ, разработана классификация возможных опционов в этой сфере. На примере ОАО «Ключевский завод ферросплавов» произведена оценка стратегической ценности проекта производства лигатуры с РЗМ. Обоснованы последовательные этапы оценки, позволяющие учесть стратегическую гибкость проекта., The article determines the role of rare-earth metals (REM) as a basis for creation of high-tech produce. A methodological approach to evaluate the efficiency of high-tech materials on the basis of REM observing their specifics is put forward. The algorithms of economic-mathematic model to optimize production and to conduct efficiency evaluation by means of real options method are presented in the article. The notion of real options in the sphere of alloying additions production on the basis of REM is commented on; potential options in the field are classified. Strategic value of alloys production with REM is measured on the example of Kluchevsky Ferro-Alloy Plant. Consecutive evaluation stages take into account strategic flexibility of the project.

This paper employs the real option theory to develop a pricing model for the transfer of property rights. We list the conditions for the good, intermediate and bad firms respectively, and work out the closed-form solution to the equilibrium transfer price, the optimal transfer timing. Using the comparative static analysis, we find that for good firms the transfer price of the target is increasing in its capital. The higher the capital of the target owns, the faster it will be transferred. For intermediate and bad firms, similar conclusions can be derived. The larger gap between the acquirer's size and market power and those of the target, the lower the transfer triggered price. The transfer price goes up as the capital ratio of the acquirer over the target diminishes, while it is decreasing in the amount of the capital the target owns.

A game in which an incumbent and an entrant decide the timings of entries into a new market is investigated. The profit flows involve two uncertain factors: (1) the basic level of the demand of the market observed only by the incumbent and (2) the fluctuation of the profit flow described by a geometric Brownian motion that is common to both firms. The optimal timing for the incumbent, who privately knows the high demand, is earlier than that for the low-demand incumbent. This earlier entrance, however, reveals the information of the high demand to the entrant, so that the entrant observing the timing of the incumbent would accelerate the its own timing of the investment that reduces the monopolistic profit of the incumbent. Therefore, the high-demand incumbent may delay the timing of the investment in order to hide the information strategically. The equilibria of this signaling game are characterized, and the conditions for the manipulative revelation are investigated. The values of both firms are compared with the case of complete information.

Land acquisition in Africa has dramatically increased recently and many land deals have been signed. A real option (RO) model is developed to examine the profitability of land investment in Africa for the agricultural purposes. In this model, the factors that can affect the willingness of private corporations abroad to lease land and then implement the agricultural projects are taken into account. A land lease contract, signed between Hunan Dafengyuan Agriculture Co., LTD and the Ministry of Agriculture of the Federal Democratic Republic of Ethiopia, for sugar cane plantation and sugar processing in Ethiopia is chosen for the case study. This land investment project is evaluated as a series of compound real options using the binomial model and the project value is compared with the evaluation result under the net present value (NPV) approach. In the empirical study, the project value under NPV approach is 1.832 billion 2008ETB, while the value under RO approach is 43.174 billion 2008ETB. The results indicate that this project is worth investing in and the real options embedded in this project are considerably valuable. Furthermore, the project value is subject to the value of some exogenous variables, including the current sugar price, the average yield of sugar cane, the volatility of sugar price, annual land rent and the discount rate. The sensitivity tests illustrate how the exogenous parameters affect the decision of investors.

Purchasing goods from distant locations introduces a significant lag between when a product is shipped and when it arrives. These transit lags are trade barriers for firms facing volatile demand, who must place orders before knowing the resolution of demand uncertainty. We provide a model in which airplanes bring producers and consumers together in time. Fast transport allows firms to respond quickly to favorable demand realizations and to limit the risk of unprofitably large quantities during low demand periods. The model predicts that the likelihood and extent to which firms employ air shipments is increasing in the volatility of demand they face, decreasing in the air premium they must pay, and increasing in the contemporaneous realization of demand. We confirm all three conjectures using detailed US import data. Fast transport thus provides firms with a real option to smooth demand volatility on international markets, and we provide simple calculations of that option value. This enables us to identify how the option value relates to goods characteristics, and to changes in air transport premia associated with technological and policy change including the introduction of jet engines, and liberalization of trade in air services.

Статья посвящена проблемам оценки инвестиций в инновационные проекты. Авторами были описаны и классифицированы основные виды реальных опционов, произведена декомпозиция инновационного процесса с точки зрения моментов их возникновения. На основе выделения внутренней и внешней неопределенности инновационных проектов авторы предложили методы инвестиционной оценки с использованием и без использования частотных и субъективных вероятностей., The article is devoted to the problem of evaluation of investments into innovational projects. The authors describe and classify the basic types of real options, and conduct decomposition of innovational processes from the view-point of the moments of their origin. On the basis of singling out internal and external uncertainty of innovation projects the authors suggest methods of investment evaluation with and without frequency and subjectivity factors.

The purpose of this dissertation is to explore how the economic return of a software investment can be assessed and managed. This topic has been studied in research and has been a concern for firms making software investments. In order to study this we need a model of the underlying factors affecting the economic return. Assessing and managing the return of a software investment is been argued to be difficult due to specific economic characteristics of a software investment, i.e. high degree of intangible consequences and uncertainty about the total investment cost. Given these characteristics it is has been concluded that it is difficult to derive a return function. In this dissertation we question this conclusion and propose a comprehensive model to assess and manage the intangibles and the underlying uncertainty. The model is deduced from general assumptions of the economic behavior of the firm. To develop the model we analyze the relevance of intangibles in relation to the economic purpose of making a software investment. Based on this a new way of deriving a cash flow function for a software investments is defined. Further it is analyzed how the underlying uncertainty of a software investment can be managed. The analysis uses a quantitative approach and methods from financial economics. It includes how the application of a real option and portfolio approach can reduce the uncertainty in a software investment and the role of efficient software platforms. The relation between software platforms and the opportunity to create different types of real options for future development is inferred from empirical studies. The studies in this dissertation show how a managerial view on a software investment corresponds with the overall economic goal of the firm. They also show how a strategic value of a software investment can be created, assessed and managed.

Due to the high level of uncertainty of research and development (R & D) investment projects, such projects are undertaken by stages. At different points in time those projects are reviewed as options to continue or abandon them arise. This decision depends upon signals provided by the projects themselves during their investment time-frame (conclusion of a research stage, product demand, raw materials price, competition, among others). Given this high uncertainty about risks in R & D projects it is difficult to value them, which may lead to either overvalue or undervalue them. This article attempts to present recent advances on the subject by identifying problems and methodologies under study in recent years. In general, currently used methodologies are categorized within multi-criteria analyses, options theory, and the theory of possibilities from a fuzzy-sets perspective., La incertidumbre que existe al invertir en proyectos de investigación y desarrollo (I+D) origina que éstos se realicen en diferentes etapas. La decisión de continuar o abandonar un proyecto se toma con base en las diferentes señales que se van presentando en él (término de una etapa de la investigación, demanda del producto, precios de materias primas en el tiempo, reacción de competidores, entre otras). De igual forma, la dificultad de valorar y seleccionar estos proyectos se centra en los riesgos en las diferentes etapas de su desarrollo, por lo que se puede llegar a sobrevaluar o subvalorar el proyecto. Debido a lo anterior, este trabajo tiene la finalidad de presentar los avances que hay sobre el tema, intentando identificar problemáticas y metodologías estudiadas en los últimos años. Las bases metodológicas que se encontraron se ubican dentro del análisis multicriterio, teoría de opciones, la teoría de la posibilidad y la teoría de los conjuntos borrosos.

The innovation process of developing new software is a challenging job and an uncertain process because of the tasks associated with the development. These uncertainties can be categorized based on what drives the uncertainty. In this paper we separate between inner and outer uncertainty. Inner uncertainty stems from how a software product shall be developed and the cost associated with it. The outer uncertainty stems from what software product shall be developed and the revenues associated with it. This paper draws on theories from innovation and development research to develop a model to analyze how the uncertainty during a software development project can be managed. In doing so, we take a supply side view on software development where the firm does not merely respond to given market needs in the development cycle but instead plays a more active role. We operationalize the supply side of the innovation process in the software development by developing a model where we analyze how service platforms create real options for future innovations. An empirical study has been conducted to examine whether and how platforms are used in software development to plant options for future innovations as suggested by the model. The study was conducted at a company that primarily develops IT-phone-service products. This study shows that the company use platforms for the development of their products. Further, it is a prerequisite for developing software at the pace as well as the cost and the quality demanded by their customers. The platforms play different roles in the development depending on the product being developed. The study describes the development of two different products and how the platforms are used in different ways in the development of these products. The differences in the use of platforms is partly because of the different nature of the products but also due to the market maturity of the software, this result in a difference in the kind of real options that is

This paper develops a formula for pricing a residential option with respect to a tenant’s so called outside option in which two new parameters are introduced; the tenant’s transactioncost of moving and moving threshold. This formula is then used to compute numerical examples of the option price for different parameter values. We believe that the pricingformula developed in this paper provides a potentially useful way of conceptualizing howhouseholds actually might think when considering buying an option. The numerical examples show that the value of the option increases with higher transaction cost of moving, and decreases with higher moving threshold. With a low moving threshold (i.e. a liquidityconstrained household) and/or a high transaction cost of moving, the rental option may have a high value for this household. This value might therefore be higher than the option value calculated the standard way, i.e. without the transaction cost of moving, and moving thresholdparameters. Naturally, the opposite situation occurs for a household with a high moving threshold and/or a low transaction cost of moving., QC 20100810

Given that a multinational enterprise can react flexibly upon exchange rate movements, international trade flows may be interpreted as an option. An enterprise will opt to export if the profits obtained from exporting under given exchange rate developments are greater than if foreign subsidiary sales were opted. Naturally, given negative exchange rate scenario situations, an enterprise will choose not to export. By virtue of a favorable exchange rate situation it may be more advantageous to implement the flexibility given by the inherent option exercise privilege. Interestingly, even taking account of entrepreneurial risk aversion aspects of enterprises, it is demonstrated that situations characterized by enhanced exchange rate volatility may still lead to greater export trade volumes.

Venture capital investments have become a major contributor the growth of start-up firms. Investing in start-up firms carries a substantial risk of failure, only a minority of start-ups is high-return investments. This put great responsibility to the valuation methods used by the venture capital firm. It is argued that when uncertainties about future pay-offs are high traditional valuation tools are of little help, they are said to be too static and not to comply with change. A valuation method that is alleged to act in accordance with a changing environment where uncertainty is high is real option which is said to consider these variables, thus giving a more accurate valuation. The structure of venture capital funding can be seen as well suited for real option valuation. The authors find it interesting to find out how venture capitalists screen possible investments, if the traditional valuation methods hold in proportion to the challenges they face and if the real option approach could be suitable. The purpose is to describe and analyze how Swedish venture capital firms can valuate investments. The research was carried out using a qualitative method. We conducted interviews with four venture capital firms that operate in Sweden. The participating firms were: Industrifonden, Itact, FöretagsByggarna and LinkMed. The authors found in their research that the most important factors when screening the possible investments are the market and the entrepreneur. The venture capital firms use of valuation methods differ significantly. LinkMed and Industrifonden apply traditional valuation tools in contrast to Itact and FöretagsByggarna that rely on personal experience and expertise. Limitations found in the traditional models were lack of accurate and reliable estimations. The structural outlay of the investment is in line with that of the real option approach and the authors believes that real options exist embedded in the respondent’s investments. This implies that a real o

Alavi Fard, F., He, J., Ivanov, D., & Jie, F. (2019). A utility adjusted newsvendor model with stochastic demand. International Journal of Production Economics, 211, 154-165. Available here

The purpose of this dissertation is to discuss the application of real option approach and technique used in valuing an acquisition project. Various valuation models based on the traditional Discounted Cash Flow approach are introduced in the paper, together with their limitations. The option theory is also explained, and then was extended to real option. A case study of Acer Inc. acquiring Gateway Inc. in 2007 is adopted to examine the application of the real option theory in the company valuation approach. In which, the process includes valuating by traditional DCF models, a theory based discussion about embedded options with the acquisition, a simple example of abandon option and a real option example of valuing firm's equity value as a call option. We highlighted the assumptions and limitations of our evaluation and analysis for Free Cash Flow to Equity model and the real option approach, both in the introduction and in the conclusion. Further recommendations and study areas are also proposed at the end of the paper.

This dissertation provides an insight of real option valuation application into real estate investment appraisal. Real estates investments have the features of low liquidity, slow payback and high sunk costs. This is especially the case appearing in emerging economics, due to the volatile demand, house price and land costs. The application of real options theory in real estate investment analysis considers a real estate development as an investment opportunity that reduces the uncertainties in the real estate development and creates economic value on real estate projects. A case study of a Chinese real estate development project "Jiangnan New Village" is conducted to illustrate the application of real option valuation to real estate investment appraisal in emerging real estate market. Binomial Tree approach is employed for real option valuation in the case study. The results lead to the conclusion that real options embedded in the real estate projects do create significant economic values on underlying project, and improve risk management of the project.

Research and development (R&D) in pharmaceutical sector are characterized by long planning horizon, high uncertainty and irreversibility. A critical component in drug development is determining the financial value of the potential compound in the light of the substantial technical and economic uncertainty (Rogers et al, 2005). Given the well-know shortcomings of DCF, real option approach is considered to capture the substantial flexibility and value of strategy involve in the R&D project. Considerable efforts have been made in modeling of real R&D options given uncertainty and managerial flexibility as the key consideration. Case study in this paper confirms the superiority of ROA in capturing the value of operating options embedded in the drug process These value have been reflected in the higher project value obtained by treating three compulsory clinical phases as a compound rainbow option than the one obtained from augmented NPV. The implication is that optimal decision can be made by management according to the different result of ROA whenever new information comes over the life of the R&D. Binominal pricing model is considered as a appropriate method to capture the characteristics of compound rainbow options.

The real estate development in emerging economies such as in China presents great uncertainty due to unstable macroeconomic conditions and regulatory changes over the life of the investment project. The traditional valuation approach Discount Cash Flow (DCF) model may be insufficient to evaluate real estate project since it cannot properly deal with the uncertainty, irreversibility and managerial flexibility of the real estate investment and thus lead to inadequate decision has been made. Instead, this paper will use a real option approach which remedies these shortfalls and provides a more scientific valuation for a real estate investment project. There are substantial applications of real options in real estate development that can be found in the literature and most of the real estate literatures look at the value of an option to wait or defer and suggests that the uncertainty makes deferring an investment more valuable than immediate investment. However, most of these studies assume that the evolution of underlying asset value follows a geometric Brownian motion process and did not taken into account any jump behaviour in the real option valuation such as the regulatory shocks, thus this paper will follow the line of previous research that focus on the analysis on the optimal timing of a real estate investment case and extend the existing model with addition of a fixed jump process that incorporating the regulatory risk into the real option analysis. Moreover, the innovative feature of this paper is to estimate the jump parameters through an event study methodology which can effective capture the impact of the regulatory change on the real estate company in terms of the abnormal returns on the company's stock price during the event day. The result of this study confirms the previous research findings that the value of the investment with the option to defer is greater than the NPV of the project and the trigger value to invest is above the current project value.

This dissertation discusses application of real option theory in valuing an strategic acquisition project. Traditionally, discounted cash flow (DCF) models are most commonly used in valuing merger and acquisition projects. However, it is argued that DCF models fail to capture real options that a strategic acquisition project may embed and hence, DCF models are likely to underestimate strategic acquisition cases. By introducing real option theory and option pricing models, it becomes intuitive to use real options analysis to calculate a project's embedded option value. By identifying the real options embedded and incorporating the real options values, the value of an acquisition project can be revealed. This dissertation adopts a case study methodology and demonstrates how real options analysis is used to investigate the value of a target company. The case adopted takes in 2003, when a Taiwanese financial holding company, Fubon, acquires a Hong Kong bank, International Bank of Asia. In conclusion, by appraising the value created by managerial flexibility and future growth opportunities, the importance of incorporating real options value into project value is addressed.

This dissertation provides an insight of real option valuation application into real estate investment appraisal. Real estates investments have the features of low liquidity, slow payback and high sunk costs. This is especially the case appearing in emerging economics, due to the volatile demand, house price and land costs. The application of real options theory in real estate investment analysis considers a real estate development as an investment opportunity that reduces the uncertainties in the real estate development and creates economic value on real estate projects. A case study of a Chinese real estate development project "Jiangnan New Village" is conducted to illustrate the application of real option valuation to real estate investment appraisal in emerging real estate market. Binomial Tree approach is employed for real option valuation in the case study. The results lead to the conclusion that real options embedded in the real estate projects do create significant economic values on underlying project, and improve risk management of the project.

Research and development (R&D) in pharmaceutical sector are characterized by long planning horizon, high uncertainty and irreversibility. A critical component in drug development is determining the financial value of the potential compound in the light of the substantial technical and economic uncertainty (Rogers et al, 2005). Given the well-know shortcomings of DCF, real option approach is considered to capture the substantial flexibility and value of strategy involve in the R&D project. Considerable efforts have been made in modeling of real R&D options given uncertainty and managerial flexibility as the key consideration. Case study in this paper confirms the superiority of ROA in capturing the value of operating options embedded in the drug process These value have been reflected in the higher project value obtained by treating three compulsory clinical phases as a compound rainbow option than the one obtained from augmented NPV. The implication is that optimal decision can be made by management according to the different result of ROA whenever new information comes over the life of the R&D. Binominal pricing model is considered as a appropriate method to capture the characteristics of compound rainbow options.

The purpose of this dissertation is to discuss the application of real option approach and technique used in valuing an acquisition project. Various valuation models based on the traditional Discounted Cash Flow approach are introduced in the paper, together with their limitations. The option theory is also explained, and then was extended to real option. A case study of Acer Inc. acquiring Gateway Inc. in 2007 is adopted to examine the application of the real option theory in the company valuation approach. In which, the process includes valuating by traditional DCF models, a theory based discussion about embedded options with the acquisition, a simple example of abandon option and a real option example of valuing firm's equity value as a call option. We highlighted the assumptions and limitations of our evaluation and analysis for Free Cash Flow to Equity model and the real option approach, both in the introduction and in the conclusion. Further recommendations and study areas are also proposed at the end of the paper.

The real estate development in emerging economies such as in China presents great uncertainty due to unstable macroeconomic conditions and regulatory changes over the life of the investment project. The traditional valuation approach Discount Cash Flow (DCF) model may be insufficient to evaluate real estate project since it cannot properly deal with the uncertainty, irreversibility and managerial flexibility of the real estate investment and thus lead to inadequate decision has been made. Instead, this paper will use a real option approach which remedies these shortfalls and provides a more scientific valuation for a real estate investment project. There are substantial applications of real options in real estate development that can be found in the literature and most of the real estate literatures look at the value of an option to wait or defer and suggests that the uncertainty makes deferring an investment more valuable than immediate investment. However, most of these studies assume that the evolution of underlying asset value follows a geometric Brownian motion process and did not taken into account any jump behaviour in the real option valuation such as the regulatory shocks, thus this paper will follow the line of previous research that focus on the analysis on the optimal timing of a real estate investment case and extend the existing model with addition of a fixed jump process that incorporating the regulatory risk into the real option analysis. Moreover, the innovative feature of this paper is to estimate the jump parameters through an event study methodology which can effective capture the impact of the regulatory change on the real estate company in terms of the abnormal returns on the company's stock price during the event day. The result of this study confirms the previous research findings that the value of the investment with the option to defer is greater than the NPV of the project and the trigger value to invest is above the current project value.

This dissertation discusses application of real option theory in valuing an strategic acquisition project. Traditionally, discounted cash flow (DCF) models are most commonly used in valuing merger and acquisition projects. However, it is argued that DCF models fail to capture real options that a strategic acquisition project may embed and hence, DCF models are likely to underestimate strategic acquisition cases. By introducing real option theory and option pricing models, it becomes intuitive to use real options analysis to calculate a project's embedded option value. By identifying the real options embedded and incorporating the real options values, the value of an acquisition project can be revealed. This dissertation adopts a case study methodology and demonstrates how real options analysis is used to investigate the value of a target company. The case adopted takes in 2003, when a Taiwanese financial holding company, Fubon, acquires a Hong Kong bank, International Bank of Asia. In conclusion, by appraising the value created by managerial flexibility and future growth opportunities, the importance of incorporating real options value into project value is addressed.

I investigate the optimal investment timing model in which investment is feasible in only one of the two regimes, which shift at Poisson jump times. I derive the option value and investment threshold in closed forms. I also prove that some solutions in previous models are obtained as the limits of the solution. The closed-form solution can be useful as a new framework to study real option problems with the illiquidity of option exercise opportunities.

I investigate the optimal investment timing model in which investment is feasible in only one of the two regimes, which shift at Poisson jump times. I derive the option value and investment threshold in closed forms. I also prove that some solutions in previous models are obtained as the limits of the solution. The closed-form solution can be useful as a new framework to study real option problems with the illiquidity of option exercise opportunities.

This paper presents a framework to study real options with illiquidity of option exercise opportunities. I incorporate a constraint that the investment time is chosen from Poisson arrival times in the standard real option value (ROV) model. I derive the closed-form solution and show that illiquidity decreases the option value of waiting and the investment threshold. I extend the results to a case with different types of projects and show that an inferior project can be undertaken in the presence of illiquidity. I prove that the solution of the illiquid model converges to that of the ROV model for higher liquidity and converges to that of the net present value (NPV) model for lower liquidity. I also show that the solution agrees with the limit of the corresponding regime-switching model. The results fill the gaps in the NPV, ROV, and regime-switching models and reveal the effects of illiquidity on investment decisions.