Extended Abstract Compound Real Options with the Fuzzy Pay-off Method

Compound real options are combinations of real options, where an exercise of a real option opens another real option. Compound real options are commonly found in a number of industrial projects, but are especially relevant in, e.g., research and development (R&D) where the R&D projects give the real option to research further, or to start the implementation of the results. Valuation of compound options with the most commonly used option valuation methods is often very complex and the methods suffer from a number of problems when used for valuation of real options. This paper discusses the valuation of compound real options with the fuzzy pay-off method for real option valuation and shows that the method reduces complexity of the valuation of compound real options.