Real Options Pricing: Evaluation of Non-traded Biotechnology R&D Projects by Beyond Arbitrage Method

In this article, we use a discount factor asset pricing method to price the internal growth opportunities of biotechnology of Taiwan which is the most popular industrial in the world since the internal growth opportunities depend on the success of finishing the R&D project of driver IC, we value it as a real option. To let our model be more concretely, we treat the internal growth opportunities as a call option on the nontradable R&D project. Since the market is not complete that is due to the illiquid risk, all pricing models based on noarbitrage or martingale arguments, such as BlackScholes formula or binomial model cannot be employed to find its option values. Instead of using these methods, our beyond arbitrage method find a price bound for the option value, and this bound is tighter than arbitrage one. By this method, we hopefully point out a direction for the people who need to price the complex real option, but finding it hard to be realized by traditional option pricing methods.