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We propose the valuation of a real option in the telecommunications industry. According to the probabilistic present worth approach, we estimate the value of a contract between a television network and a company willing to advertise its business on this network. We assume that the value of the contract depends on a time-dependent variable, i.e., the number of viewers tuned into the network, which behaves like a Markov process. After discretizing and converting this number into a monetary value through a specific function, we compute the nth-order moment of the total discounted earnings. The knowledge of the moments, and the application of the maximum-entropy approach, allows to find the probability distribution of the payoff function and the consequential pricing of the real option. Finally, we apply the proposed model to the real television audience data. [ABSTRACT FROM AUTHOR]

We investigate an optimal stopping problem for the expected value of a discounted payoff on a regime-switching geometric Brownian motion under two constraints on the possible stopping times: only at exogenous random times, and only during a specific regime. The main objectives are to show that an optimal stopping time exists as a threshold type and to derive expressions for the value functions and the optimal threshold. To this end, we solve the corresponding variational inequality and show that its solution coincides with the value functions. Some numerical results are also introduced. Furthermore, we investigate some asymptotic behaviors. [ABSTRACT FROM AUTHOR]

In today’s complex and developing world, making accurate and timely decisions is very important for both managers and investors. The progress in the financial field, the invention of new financial methods and tools and the introduction of various software packages indicate the fact that in developed and developing economies, relying on traditional decision-making methods doesn’t meet the needs of investors due to market requirements and competition to catch the opportunities among investors, especially institutional investors active in the real sector of the economy. The real option is a systematic approach in which economic modelling can be done using financial theory, economic analysis, operations research, decision theory, and statistical science. The present study was conducted to identify the components of the real option to choose in knowledge enterprises. The research was done with a qualitative approach. In the qualitative section, the components of real options to choose from in knowledge enterprises were identified through interviews and qualitative content analysis methods. The statistical population in this section included university specialists and experts, managers of knowledge enterprises and competent individuals with executive positions in those companies who have executive experience at decision-making levels. The sample size was obtained by purposive sampling equal to 12 people. Based on the results of the qualitative section, 10 main components and 63 sub-components were recognized to identify real options. After identifying the components, the axial category, including two real options: the abandonment option and expansion option, was identified by experts. These two options were valued for 15 knowledge enterprises by the Black-Scholes model. The results showed that the exercise of real options in knowledge enterprises optimizes the value of the company. [ABSTRACT FROM AUTHOR]

The proper solution to the optimal investment decision plays an important role in the decision-making process. Compared to the classical net present value rule, the real option approach captures the value of the flexibility embedded in the investment opportunity. In this paper we study relevant dynamic models interpreting the project as well as flexibility value as the option premium, namely investment projects from the mining industry. Specifically, the problem we face is described by systems of partial differential equations of the Black-Scholes type in terms of time and output price, equipped with the terminal condition enforced at time instants resulting from the specific timing and type of the flexibility that such an investment provides. As a result of that, the comprehensive methodological concept, based on the discontinuous Galerkin approach, is proposed to improve the numerical valuation process. The resulting numerical procedure is sufficiently robust to cope with an early exercise constraint as well as a wide range of model parameters. Finally, the performance of the solving procedure is accompanied within the conceptual case study arising from mining industry, supplemented by comments of practical importance. [ABSTRACT FROM AUTHOR]

We examine how financial disclosure policy affects a firm manager's strategy to innovate within a two‐period bandit problem featuring two production methods: an old method with a known probability of success, and a new method with an unknown probability. Exploring the new method in the first period provides the manager with decision‐useful information for the second period, thus creating a real option that is unavailable under exploiting the old known production method. Voluntary disclosure of the firm's financial performance provides the manager with another option to potentially conceal initial failure from the market. The interaction of these two options determines the manager's incentive to explore. In equilibrium, a myopic manager who cares about the interim market price may over‐ or under‐explore compared to the optimal exploration strategy that maximizes firm value. Our analysis shows that firms operating in an environment with voluntary disclosure early in the trial stage and mandated requirement later are most motivated to explore, while firms subject to early mandated disclosure and late voluntary disclosure are least likely to do so. We also provide empirical predictions about the link between the disclosure environment and the intensity and efficiency of corporate innovation. [ABSTRACT FROM AUTHOR]

We use a real‐option model to study the effect of input supplier's market power on a firm's capital structure, and identify the Nash equilibrium outcome (firm's investment and financing policies and its supplier's pricing policy). When its supplier has market power, the firm will reduce leverage ratio and delay investment. This can help explain why observed leverage ratios are lower than in traditional capital‐structure models (without supplier market power). Firm value can be increased by the vertical acquisition of the supplier, which would also result in a higher leverage ratio. This helps explain the observed increase in leverage ratios after acquisitions. [ABSTRACT FROM AUTHOR]

Carbon capture utilization and storage (CCUS) emerges as a pivotal strategy for CO2 reduction in the power sector, particularly focusing on the overlooked domain of offshore storage along China's east coast. In spite of the potential high costs, irreversible investments, and lengthy development, offshore storage can still be prospective. Considering autonomous decision-making among emission sources, this study pioneers a CO2 offshore storage investment decision model tailored for coal-fired and gas-fired power plants. Innovating an offshore storage source-sink matching model with a real options model and introducing a pipeline network optimization model allows a realistic source-sink matching strategy to be explored under optimal investment timing. According to the results, among 154 large stationary emission sources in Zhejiang Province, offshore storage could reduce CO2 emissions by 4.59 Gt, utilizing the Qiantang, Minjiang, and Fuzhou depressions. It is economically feasible to implement offshore storage with a whole-process unit cost of 368.8 CNY/tCO2, mainly dominated by capture costs. A hybrid carbon tax-subsidy policy promotes carbon reduction and economic benefits, offering a more effective incentive for emission sources to invest in offshore storage than a single policy. At a hybrid policy price of 250 CNY/tCO2, all 27 selected emission sources are projected to invest in offshore storage by 2048, with a preference for the Qiantang depression as the storage site. Practically, this study provides important technical support and guidance for the large-scale deployment of offshore storage.

(1) Background--Forest management has become one of the important means to alleviate environmental problems because of its economic and ecological benefits. The commercial value of traditional forestry projects is limited, while the income from carbon sinks trading becomes the main growth point of forestry economic benefits. However, forestry carbon sinks projects have long operating cycle, strong policy and complex value evaluation. It is difficult to describe the value of forestry carbon sinks by traditional evaluation methods, but the real option theory is more suitable for evaluating the comprehensive value of forestry carbon sinks. Compared with the B-S model, the binary tree model is more consistent with the phased and periodic characteristics of forestry carbon sinks. (2) Methods--Based on the real option theory, this paper first analyzed the option characteristics of forestry carbon sinks project, revealed the value composition of forestry carbon sinks project, and established the value evaluation model of forestry carbon sinks project based on the binary tree model. Then, the carbon sinks afforestation project in Arshaan City of Hinggan League of Inner Mongolia Autonomous Region was selected as the research object to evaluate the practical value of the project. Finally, the sensitivity analysis was used to analyze the impact of timber price, carbon price and risk-free interest rate on the project value. (3)Results--First, forestry carbon sinks project has option characteristics, and the real option theory can evaluate the potential value brought by uncertainty. The value of forestry carbon sinks project consists of three parts; forest assets value, carbon sinks assets value and option strike price. The fluctuation of forest assets and carbon sinks assets will bring their respective option values. Second, the overall value of the project under different e-valuation models is significantly different. In the NPV model, when the project is developed as a general afforestation project, the net income is -9.102 1 million yuan, the unit economic income is -2 068.65 yuan/hm,and the project is a loss. When the project is developed as a carbon sinks afforestation project, the net income is 297,900 yuan, the unit economic income is 67.70 yuan/hm, and the carbon sinks income increases the income of the project. In the real option model, the value of forest assets is 163.709 2 million yuan, the value of carbon sinks assets is 18.892 6 million yuan, the total value of the project is 81.452 2 million yuan, and the unit economic benefit is 18,511.87 yuan/hm . The option value of forest assets and carbon sinks assets significantly improves the project efficiency. Third, in the sensitivity analysis, timber price and carbon sinks price have a positive impact on the project value, while the risk-free interestrate has a negative impact on the project value. (4)Conclusions and Discussions--Based on the above conclusions, the following policy suggestions are put forward: First, strengthen the application of the real option method in the actual evaluation of the value of forestry carbon sinks projects, improve the evaluation mechanism of forestry carbon sinks projects, fully consider the option value of projects when the evaluation returns are negative by using the traditional method, and consider the opportunity value brought by fluctuation in the riskier market environment. Second, make full use of uncertainties in forestry carbon sinks projects. At the individual level, encourage the forest farmers to carry out carbon sinks afforestation projects, help them realize the diversified value of carbon sinks afforestation projects, and further stimulate the willingness of the forest farmers to participate. At the market level, guide multiple entities to participate in the implementation of forestry carbon sinks projects, and strengthen the understanding of the market and business entities on the forestry carbon sinks trading. Third, improve the trading mechanism of forest resources, deeply explore the market system of carbon sinks trading, guide the benign fluctuations of timber prices and carbon sinks prices, further enhance the social benefits of forestry carbon sinks projects, and properly regulate the risk-free interest rate, reduce the market access threshold, and improve the ecological compensation mechanism. [ABSTRACT FROM AUTHOR]

I study a two-player continuous-time dynamic coordination game with observational learning. Each player has one opportunity to make a reversible investment with an uncertain return that is realized only when both players invest. Each player learns about the potential return by observing a private signal and the actions of the other player. In equilibrium, players' roles as leader and follower are endogenously determined. Information aggregates in a single burst initially, then gradually through delayed investment and disinvestment over time. More precise signals lead to faster coordination conditional on initial disagreement, but might also increase the probability of initial disagreement. [ABSTRACT FROM AUTHOR]

We propose a real options model with regime shifts to investigate the effect of cutting interest rates on corporate investments when a financial crisis occurs. Cutting interest rates would lower the investment project's hurdle rate. The reduction in hurdle rate is positively related to the magnitude of interest rate cuts and the persistence of the financial crisis. The hurdle rate becomes lower in the financial crisis state because the reduction in interest rate would lower the cost of capital and the opportunity cost of immediate investment. In the numerical analysis of this study, we show that the change in the opportunity cost accounts for most of the change in the hurdle rate. Upon taking into consideration the firm's financing constraints, we find that cutting interest rates accelerates investments for firms with high liquidity. However, for firms with low liquidity, the optimal investment threshold is not affected by the variation in interest rates. Instead, the investments of low‐liquidity firms are affected by the change in the friction of credit supply. [ABSTRACT FROM AUTHOR]

The paper adopts a difference-in-difference method to investigate the impacts of government-initiated neighborhood renewal programs on the values of aged housing properties in Hangzhou, China. Three empirical findings are obtained. First, the renewal raised living utility values and thus rents of the renewed properties. Second, the improvement in living utility value is partially offset by a reduction in the option value of housing redevelopment, because government planning policy specifies that the renewed neighborhoods will not be redeveloped at least in the next 5–10 years. Third, housing prices in neighborhoods farther away from scenic spots, which were generally lower, even dropped after the renewal. This evidences the complementarity between housing conditions and external environment, i.e., the renewal raises housing values less if the external environment is more inferior. These findings have important policy implications for urban renewals. [ABSTRACT FROM AUTHOR]

The growing demand for value-added agrifood products, combined with a changing economic environment and greater uncertainty, requires the application of flexible valuation methods that reflect the real value of an asset in the face of changes in investment. The objective of this study is to determine the impact of hibiscus (Hibiscus sabdariffa L.) price volatility on the decision to carry out a productive reconversion by low-income farmers who conventionally grow hibiscus in association with maize. It is stated that the producer will have greater incentives and will opt for a productive reconversion as the volatility of conventional hibiscus prices increases. This study was conducted in the state of Guerrero, Mexico, in 2020. Information on prices, yields, production, and harvesting costs was obtained from databases and interviews with producers. The interviews were conducted using the focus group method, while the binomial method was used to apply the option theory. The results revealed that the productive reconversion was profitable in no less than seven years. Additionally, a variation in volatility from 0.15 to 0.30 increased the likelihood of conventional hibiscus producers facing low prices by 27 to 44 %, improving the incentive to adopt a higherquality production system. Therefore, it is confirmed that the real options theory is sufficiently flexible to model the impact of price volatility on producer investment decisions, in addition to providing a better understanding of low-income producers’ decisions to implement a productive reconversion system. [ABSTRACT FROM AUTHOR]

This research aims to explore the recognized advantages of Communities of Practice (CoPs) in enhancing knowledge sharing and spurring organizational transformation. Despite their acknowledged importance, CoPs often receive inadequate attention or representation in numerous organizations, likely due to leaders' unfamiliarity or insufficient skills to manage such groups. This study introduces the "Real Option Perspective" as the recommended approach for top executives to understand and leverage CoPs. Initially, it clarifies the concepts of CoPs and the Real Option Perspective, highlighting their significance. These concepts then lay the groundwork for developing a management model for CoPs. The proposed management trajectory for CoPs involves five phases: Investment in CoPs, Recognition of Stagnation, Re-engagement with CoPs, Transition of Value, and finally, Dissolution and Feedback. This research seeks to expand the applicability of the Real Options framework in managing CoPs, providing leaders with strategic insights to fully realize the potential of CoPs in line with organizational objectives. [ABSTRACT FROM AUTHOR]

Uncertainty and risk abound in supply chains. One such form of risk existing in global supply chains comes from volatility associated with currency fluctuations—Foreign Exchange (FX) risk. Although the study and practice of using financial hedging instruments are well documented, there are also emerging supply chain strategies firms may adopt for mitigating FX risk. The purpose of this multi‐method study is to investigate how supply chain professionals perceive and mitigate FX risk, as well as to measure how investing in supply chain flexibility strategies affect firm financial performance. Using a mixed‐method approach based on qualitative case studies and simulation experiments using the lens of Real Option Theory, we are able to show how investments in supply chain flexibility strategies can mitigate FX risk in terms of cash flows and profits. Theoretical, methodological, and managerial implications are provided for better understanding FX risk in the emerging supply chain finance discipline. [ABSTRACT FROM AUTHOR]

We analyze real options investment under asymmetric information on investment costs, where decisions not only involve investment timing, but also investment quantity. A principal, the regulator, offers a menu of contracts to the agent (the regulated firm). The regulated firm has better information on costs than the regulator, and the optimal regulation trades off distortions in investment decisions and informational rents left to the firm. In a non-dynamic situation, it is well known that optimal contracts involve downward distortions on investment quantity. In the dynamic, real options situation, distortions also occur in investment timing: a high-cost firm's investment will be delayed beyond the optimal time, until revenues reach a higher investment threshold. We explore the effect on investment quantity in this real option regulation under various assumptions on the stochastic process for revenues. On the one hand, the higher investment threshold tends to increase investment quantities, whereas screening of high-cost firms would favour reducing their investment quantity. We find a simple sufficient condition for the latter, quantity-reducing, effect to dominate, and show that it is satisfied for a wide range of commonly used stochastic processes. [ABSTRACT FROM AUTHOR]

In the era of energy transition, climate and topography characteristics make wind energy a promising renewable energy source in South Korea. Following the successful operations of onshore wind power generation, the South Korean government has implemented the 3020 renewable energy implementation plan with a target of establishing 12GW offshore wind farms by 2030. Considering financial and time constraints, it is important to determine the most suitable locations to enable renewable energy farms to achieve the proposed targets for renewable energy production. Although several studies conducted in South Korea have assessed the economic feasibility of potential wind farm sites using the discounted cash-flow method, this method involves some limitations regarding incorporating the value of flexibility and uncertainty factors in the site evaluation process. Thus, this study utilized a real options approach – the Geske compound option model – in a system dynamics framework to evaluate potential sites for offshore wind farms on the mid-west coast of South Korea. Using the developed potential site evaluation model, this study obtained different results from the reference study, which conducted cost-benefit analyses of the same areas. The results of this study demonstrate the importance of flexibility value and uncertainty factors in the site evaluation process. This study also estimates the environmental mitigation of each potential site concerning carbon emission reduction for offshore wind farms.

This paper investigates the effects of contingent capital, a debt instrument that automatically converts into equity if the value of the asset is below a predetermined threshold on the pricing process of a bank assets’. A traceable form of the contingent convertible bond is analyzed to find a closed-form solution for the price of this bond using barrier and growth options. We examine the interaction between growth options and financing policy in a dynamic business model. The contribution of this paper is to extend Hilscher and Raviv [10] and Tan and Yang [22] research to include the evaluation of all aspects of banks' financial structure, with an emphasis on explicitly calculating the likelihood of the default event. The fundamental theorem of asset pricing and the first passage of time method have been used to generate closed formulas that are amenable to practical analysis. The potential benefits from contingent capital as financing and risk management instrument can be assessed through their contribution to reducing the probability of default. The appropriate choice of contingent capital parameters, the rate, and the conversion threshold can reduce shareholders incentives to change risk.

Problem definition: Modern technologies have made it viable for firms to lower the costs of switching on and off production in response to market changes. In this paper, we explore how production start–stop flexibility impacts joint operating policies, financing, and investment timing decisions. Methodology/results: We develop a continuous-time, optimal stopping model in which equity holders of the firm make operational decisions regarding pausing and restarting production as well as when to default. The degree of production flexibility is measured by switching costs. On the one hand, production flexibility influences the trade-off between tax shields and default costs for the capital structure decision; on the other hand, debt levels impact the equity holders' incentive to use flexibility by pausing and restarting operations. We find that optimal debt usage is not monotone in production flexibility. Specifically, when switching costs are in a low region, the optimal debt level decreases slowly as switching costs increase. As switching costs increase into an intermediate region, the optimal debt level decreases sharply because the firm needs to reduce its debt to ensure the equity holders maintain flexible operating policies. However, when switching costs exceed a threshold, the cost of compromising the use of debt becomes excessive, and the firm substantially increases its debt to gain the full benefit of the tax shield; in so doing, the equity holders forgo flexibility and maintain production continuously until default. This financing strategy affects the firm's investment timing decision, which also exhibits a nonmonotone pattern. Managerial implications: When a firm optimizes the debt usage and investment timing, the incentive of utilizing flexibility embedded in the production technology by the equity holders needs to be taken into account. Our findings also reveal new benefits and guidance for the potential design of incentive contracts to mitigate agency costs. Funding: Q. Wu was supported by Weatherhead School of Management Intramural [Grant IG121420-05-QXW132] for this research. Supplemental Material: The online supplement is available at https://doi.org/10.1287/msom.2022.0213. [ABSTRACT FROM AUTHOR]

The study in the article aims to improve the methodology for calculating the price of an option agreement. The subject is calculating the price of the option agreement for a real option with the right to sell/purchase. The hypothesis is that using a more objective calculation formula will increase the efficiency of making the corporation’s strategic investment and management decisions. The method of mathematical modelling is used to refine the methodology for calculating the price of an option agreement within the framework of the ways of real options and discounting cash flows. The article justifies and clarifies the calculation formulas for the price of an option agreement for a real option with the right to sell/purchase. It has been shown that an objective assessment of the value of this option is a powerful tool for making a strategic investment decision. The article’s novelty is the combination of the practice of hedging standards for transactions and methods of real options and discounting cash flows when developing a model for calculating the price of an agreement. The application of a more objective pricing formula for an options contract, limited to the specified project profitability index, confirms the hypothesis. A more objective assessment of the effectiveness of projects with the application of real options is a competitive advantage of the corporation due to the ability to benefit further from risk and uncertainty. The direction of future research is the formalization of the option pricing model for calculating net assets.

Abstract In this study, we develop and empirically test a valuation model for a commonly encountered option in office leases: a tenant’s option to renew at future market rent (a fair market value) with lease termination as the maturity date. The model integrates decision analysis with real options analysis and market risk with private risks. “Option value” is defined as the private value of the option to either party pre-contract, while “option price” assumes a fair agreement between transacting parties and can be positive (rental premium paid) or negative (rental discount offered). Without manifest expectations, an analysis of a sample of office leases supports the model’s logic with price estimates in a practical range. The tenants’ option price/value is shown to have a negative relationship with the original/renewal lease term; conversely, the landlords’ option value is positively related to the original/renewal term. Comparative analyses show that transaction costs have a positive effect on tenants’ option value and on prices, while vacancy costs and the vacancy period are both positively related to the landlords’ option value and negatively related to price. Market rent is found to have a negative relationship with option price. Overall, this study provides a theoretical analysis and empirical tests of the value of a real option that allows option holders to renew/extend their contracts at a fair market value.

Multi-stage planning is common for expanding infrastructure complexes or networks. Previous real-option studies developed a sequential compound call option (SCCO) for evaluating multi-stage infrastructure investment projects, including evaluating abandonment options during individual pre-scheduled investment stages. In practice, however, investment schedules involve risk and uncertainties forcing investors to change plans, raising an important issue regarding investors having more options at each commencement date. This study introduces a new model, the sequential compound deferrable call option (SCDCO), incorporating deferment options for each fold in an n-fold setting and generalizing the exercise of each deferment option into mn periods. A closed-form solution to the valuation of SCDCO is derived accordingly. A real-world case demonstrates that introducing deferment options increases project value, but the marginal benefit of increasing deferment time diminishes. The presence of dedicated assets for the usage of future expansions can also increase project value, but this increase is restricted by deferment options. Furthermore, the investment cost growth with an increase of deferment time rapidly decreases project value and vice versa. Inflation or deflation is therefore important to consider in deferment decisions. Finally, although deferment options only produce limited project value, they have the flexibility to manage risks, changes, and budgetary constraints. [ABSTRACT FROM AUTHOR]

In order to encourage social capital to sustainably enter waste incineration power generation projects, policy-makers propose demand guarantee policies to ensure the fundamental interests of social capital. Nowadays, demand guarantee policies in China are artificially set based on industry experience and similar biomass power generation projects but lack theoretical support, thus bringing pitfalls to sustainable development. To address this issue, this paper constructs a decision model under the Real Option Approach to obtain investment triggers and guarantee level. Under lower, upper and bidirectional demand guarantee policies, this paper compares three Real Option models considering uncertain factors. The results show that demand guarantee policies usually have an excess guarantee phenomenon that affects long-term interests, and the lower demand guarantee policy can most effectively promote social capital to invest. Policy-makers can choose appropriate policies based on their demands or adjust existing guarantee policies to avoid the excessive guarantees phenomenon and attract social capital to invest in waste incineration. [ABSTRACT FROM AUTHOR]

In this study, we develop and empirically test a valuation model for a commonly encountered option in office leases: a tenant's option to renew at future market rent (a fair market value) with lease termination as the maturity date. The model integrates decision analysis with real options analysis and market risk with private risks. "Option value" is defined as the private value of the option to either party pre-contract, while "option price" assumes a fair agreement between transacting parties and can be positive (rental premium paid) or negative (rental discount offered). Without manifest expectations, an analysis of a sample of office leases supports the model's logic with price estimates in a practical range. The tenants' option price/value is shown to have a negative relationship with the original/renewal lease term; conversely, the landlords' option value is positively related to the original/renewal term. Comparative analyses show that transaction costs have a positive effect on tenants' option value and on prices, while vacancy costs and the vacancy period are both positively related to the landlords' option value and negatively related to price. Market rent is found to have a negative relationship with option price. Overall, this study provides a theoretical analysis and empirical tests of the value of a real option that allows option holders to renew/extend their contracts at a fair market value. [ABSTRACT FROM AUTHOR]

This paper explores the question of whether real estate development (RED) projects systematically present positive net present value (NPV) and therefore, provide super-normal profit. Such projects are the products of a business operation that governs the exercise of the real call option on development that is represented by developable land. We present a framework for considering super-normal profit in the RED industry, and then in light of that framework we examine RED projects produced by publicly-traded equity real estate investment trusts (REITs). We find strong evidence of positive correlation between REITs' Tobin-Q ratios, indicative of positive NPV, and the ratio of development assets to total assets in the firm, controlling for other factors. The nature of the firm's Tobin's-Q metric is such that the implied added firm value is net of land cost and net of overhead and search costs associated with the RED business operation. While our findings do not prove a direction of causality between REITs' RED activity and positive NPV, the robust positive correlation controlling for other factors raises interesting implications which are discussed in the paper. [ABSTRACT FROM AUTHOR]

In mid-spring semester 2020, COVID-19 caused nearly all universities to switch to online learning. Many schools allowed students to choose between a letter grade or a passing grade once the semester was done to mitigate the impact of the disruption of the learning environment, which some feared would disproportionately affect marginalized populations. At Lafayette College, however, students were required to choose their grading scheme one week prior to final exams. We model the right to elect pass/fail grading as a real option. We find the main determinants that make election of pass/fail more likely are if the student is a male, senior, Black, Latino, non-resident, has a low GPA, or is in a class where grades are dispersed. [ABSTRACT FROM AUTHOR]

Reliability Options (ROs) are one type of Capacity Remuneration Mechanisms (CRMS) to meet generation adequacy requirement, and it has been applied in some power markets. When a power producer sells a RO, he will receive an option fee but have to sell power at a price below the strike price which is set by the buying side. This mechanism may have some impacts on the investment decisions of power producers. In this paper, the investment timing of power producers is studied. A stochastic differential electricity price model and an investment decision model are built. Some characteristics, such as mean-reversion, multi-periodic and gradual growth are considered in the price model. Real option pricing model is used to make generation investment decision and it is equivalent to a linear complementarity problem. The numerical solution is obtained by the Successive Over Relaxation (SOR) method. The example results show that the different settings of strike price and option fee will lead to early or late investment.

A vertical agroforestry system composing of fast-growing and high-yield poplar (Populus sp.) trees and underwood button mushroom (BM) (Agaricus bisporus) has been increasingly adopted in Shandong, China, driven by the motivation to increase economic benefits from a fixed land area. Because this is a relatively new agroforestry system in the region, uncertainties associated with the poplar forest and mushroom production and markets as well as managerial flexibility are inevitable and needed to be taken into account in its investment decision-making. We applied both traditional net present value (NPV) and real options methods to evaluating the investment in this agroforestry system. Regarding the investment options, we considered and evaluated the option to delay, option to expand, as well as option to abandon the investment using a binomial option-pricing model with the assumption that the BM price would follow a multiplicative binomial process. Our calculated option values were significantly greater than the NPVs, suggesting that the investment in this agroforestry system would be considered more favorable financially if it is evaluated using the real options method than the NPV approach that ignored the uncertainty and managerial flexibility. Our findings indicate that the inclusion of inherent options and managerial flexibility can complement static NPV analysis in assessing the agroforestry system that faces market uncertainty. [ABSTRACT FROM AUTHOR]

Copyright of Business Administration Quarterly / Kwartalnik Nauk o Przedsiebiorstwie is the property of SGH Warsaw School of Economics and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

In timing property listings, real estate developers can exercise the "option to wait" or "option to presell" to mitigate price uncertainty risk. In this study, we study the effectiveness of both strategies under a unified framework. We test our hypotheses using residential development data from Hong Kong between 1995 and 2015. Empirical evidence shows that when the presale option is unavailable, developers tend to adopt the waiting strategy when facing price uncertainty risk. Conversely, when a presale option is available, developers will accelerate sales when price volatility is high. Moreover, the effectiveness of the presale option depends substantially on government restrictions. Our approach facilitates the identification of the net effect of either tool and provides an opportunity to unify conflicting findings in the literature. [ABSTRACT FROM AUTHOR]

Copyright of Natural Gas Industry is the property of Natural Gas Industry Journal Agency and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

In its 2023 strategy for reducing GHG emissions from ships, the International Maritime Organization aims for the uptake of zero or near-zero GHG emissions technologies, fuels or energy to represent at least 5 %, striving for 10 %, of the energy used by 2030. Measures proposed to reach this target combine two kinds of policy instruments: an emission intensity standard and GHG emissions pricing. Proposals vary in terms of the design of the pricing scheme and the subsequent uncertainty that would affect the price signal. This paper assesses the extent to which emissions pricing effectively complements a more restrictive standard on the intensity of GHG emissions to boost transition to low-carbon vessels. Attention is paid to the role of the volatility of the price signal of GHG emissions and fuels prices. For this purpose, the paper applies a multiple real options model to the decision to renew a ship under various sources of uncertainty. Simulations carried out based on a case study show that the price signal effectively complements the more restrictive standard but that the decarbonization objectives are only achieved with a quite ambitious level of pricing. The role of the volatility of the price signal of GHG emissions appears negligible compared to other sources of volatility. • Implementing a carbon levy would lead to a significant probability for ship owners to shift to low-emission fuels. • The level of the carbon price would need to be quite high in order to make the switch to low- emission fuels close to certain. • Implementing a very high level of carbon pricing seems difficult, which advocates for introducting a fuel emission standard. • Combining both instruments should incentivize the ship owner to anticipate the investment in a low-emission ship. [ABSTRACT FROM AUTHOR]

We consider an irreversible investment decision problem on a finite time horizon where an instantaneous cash flow process of a firm follows a regime-switching jump-diffusion (RSJD) model. The value of a project can be derived from a partial integro-differential equation (PIDE) and then we obtain a closed-form solution of the PIDE. It is proved that the value of the project converges to the solution on an infinite time horizon problem as the lifetime of the project tends to infinity. Moreover, the value function of a real option with a finite expiration date can be evaluated by solving a linear complementarity problem (LCP) under the RSJD model. We apply a 2-step backward differentiation formula (BDF2 method) combined with an operator splitting method to solve the LCP and then it has the second-order convergence rate in the discrete ℓ 2 -norm with respect to the time and spatial variables. The stability of the proposed method to solve the LCP is also proved in the discrete ℓ 2 -norm. Finally, a variety of numerical experiments are carried out to determine the optimal investment time and the numerical results on the finite time horizon are analyzed. [ABSTRACT FROM AUTHOR]

This paper attempts to explore the dynamic relationship between new energy industry development and energy structure transformation in China. Based on the real option model and stochastic frontier analysis (SFA), the development scale and technical level of the new energy industry are measured at the provincial level. The eastern region is in the lead, but there has been a certain degree of technological efficiency retreat, especially in Liaoning. The new energy industry in the central region has developed rapidly due to the deepening of the industrialization process. With the aid of PVAR model, impulse response function and variance decomposition, the results show that there exists a bidirectional dynamic relationship between the new energy industry and energy structure. In other words, the development of the new energy industry and the energy transition can be mutually predicted. Specifically, technology effect has a positive continuous and dramatic influence on the transformation of energy structure. In turn, the energy transition first elicits a response to size effects, but has a long-term impact on technology effects. This implies that the new energy industry will usher in scale expansion at the early stage of energy transition. It is worth noting that scale expansion will not always accelerate the transition process. At that time, technology played a long-term and central role. Therefore, reasonable expansion of new energy industry scale and efforts to develop new energy technology are important measures to ensure the orderly energy transition.

We investigate the investment timing and financing decisions of financially constrained small and medium‐sized enterprises (SMEs) in a real‐option setting with asymmetric information. 'Bad' firms can sell over‐priced securities by mimicking in a pooling equilibrium. However, 'good' firms can separate from bad firms by imposing an adverse selection cost for mimicry only when the benefit of being recognized as the 'good' type outweighs the investment distortion costs. Further, asymmetric information induces good firms to accelerate investment, leading to investment distortion and higher guarantee costs. Equity‐for‐guarantee swap not only mitigates SMEs' financing constraints but also reduces the investment and finance distortions. [ABSTRACT FROM AUTHOR]

This paper examines the net benefit accruing to a government when choosing between a lower tax rate on future profits and an investment subsidy as investment stimulation. We hypothesize that either the firm or the government faces Knightian uncertainty in contemplating investment. In the presence of the firm's Knightian uncertainty, the government prefers the investment cost subsidy to tax rate reduction as the conventional wisdom in prior literature. However, if the government is concerned about the model uncertainty, the optimal policy depends on the varying characteristics in reality, such as the ambiguity level, the growth rate, the volatility, as well as the interest rate environment. The tax rate cut is favorable when the growth rate, the discount rate, and the volatility are lower, and when the ambiguity parameter is higher. By taking into account Knightian uncertainty, we provide a potential rationale behind evaluating stimulus policies in different economic environments. [ABSTRACT FROM AUTHOR]