A Stochastic Control Framework for Real Options in Strategic Evaluation
The theoretical foundations for real options goes back to the mid 1980s and the development of a model that forms the basis for many current applications of real option theory. Over the last decade the theory has rapidly expanded and become enriched thanks to increasing research activity. Modern real option theory may be used for the valuation of entire companies as well as for particular investment projects in the presence of uncertainty. As such, the theory of real options can serve as a tool for more practically oriented decision-making providing management with strategies maximizing its capital market value. The book unfolds and examines a new framework for classifying real options from a management as well as a valuation perspective, giving the advantages and disadvantages of the real option approach. Impulse control theory and the theory of optimal stopping combined with methods of mathematical finance are used to construct arbitrarily complex real option models which can be solved numerically and yield optimal capital market strategies and values. Various examples are given demonstrating the potential of the proposed framework.
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abandonment option American option assumed Brownian motion capacity level capital markets competition contingent claim continuation region decay regime demand parameter level Dynkin formula entry and exit equation equivalent martingale measure example exogenous Figure financial option financial option pricing firm's fixed capacity flexible capacity project flow function Furthermore geometric Brownian motion graphical representation growth regime impulse control model impulse control problem impulse control strategy inactive instantaneous cash flow intensity option investment project Ito's lemma managerial flexibility market value Modelling element operating strategies optimal capacity optimal stopping optimization problem option pricing theory option to invest option value product life cycle quasi-variational inequalities real option analysis real option approach real option interactions real option pricing regime switching risk neutral simulation sources of uncertainty Stackelberg competition stochastic control framework stochastic dominance stochastic process switching cost switching option Trigeorgis trigger price underlying asset underlying sources valuation value function variable verification theorem zero