This paper analyzes the theoretical problem of the real option with barrier. It models an investment decision with a double irreversibility concern: investing is irreversible, but waiting runs the risk of loosing the opportunity to invest. The optimal strategy leads to earlier investment when the barrier increases, or when uncertainty decreases. Uncertainty has ambiguous effects on the expected...

We provide a general valuation approach for capital budgeting decisions involving the modularization in the design of a system. Within the framework developed by Baldwin and Clark (2000), we implement a valuation approach using a numerical procedure based on the Least Squares Monte Carlo method proposed by Longstaff and Schwartz (2001). The approach is accurate, general and flexible.

This paper describes how to evaluate a long-term fixed priced material procurement contract versus spot purchases. We model the long-term contract as a real option. In the financial world, option pricing is based on the assumption that the market is complete and frictionless. This assumption is usually too strong when it comes to pricing real options. For example, both the option and its underl...

We conduct a laboratory experiment to study whether people intuitively use real-option strategies in a dynamic investment setting. The participants were asked to play as an oil manager and make production decisions in response to a simulated mean-reverting oil price. Using cluster analysis, participants can be classified into four groups, which we label as “mean-reverting,” “Brownian motion rea...

To have a real option means to have the possibility for a certain period to either choose for or against making an invetsment decision, without binding oneself up front. The real option rule is that one should invest today only if the net present value is high enough to compensate for giving up the value of the option to wait. Because the option to invest loses its value when the investment is ...

Financial options are known from the financial world where they represent the right to buy or sell a financial value (mostly a stock) for a predetermined price (the exercise price), without having the obligation to do so. Real options in option thinking are based on the same principals as financial options. In real options, the options involve real assets as opposed to financial ones. To have a...

the purpose of this paper is to review the real options literature, which has provided a promising area of development in the capital budgeting process of the firm, and to emphasize that employing the new theory, as part of the information system, depends heavily on the implementation of computer information systems, as decisions support systems (dsss) . the paper concentrates on two important ...