Real Option Value Calculation by Monte Carlo Simulation and Approximation by Fuzzy Numbers and Genetic Algorithms

The paper compares numerically the results from two real option valuation methods, the Datar-Mathews method and the fuzzy pay-off method. Datar-Mathews method is based on using Monte Carlo simulation within a probabilistic valuation framework, while the fuzzy pay-off method relies on modeling the real option valuation by using fuzzy numbers in a possibilistic space. The results show that real option valuation results from the two methods seem to be consistent with each other. The fuzzy pay-off method is more robust and is also usable when not enough information is available for a construction of a simulation model.

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The Value of Flexibility at Global Airlines: Real Options for EDW and CRM

Kellogg School of Management Cases ◽

10.1108/case.kellogg.2016.000368 ◽

2017 ◽

pp. 1-18

Author(s):

Mark Jeffery ◽

Chris Rzymski ◽

Sandeep Shah ◽

Robert J. Sweeney

Keyword(s):

Monte Carlo ◽

Real Options ◽

Real Option ◽

Monte Carlo Analysis ◽

Active Management ◽

Growth Options ◽

Option Value ◽

Real Options Analysis ◽

The Real ◽

Real Option Value

Technology projects are inherently risky; research shows that large IT projects succeed as originally planned only 28 percent of the time. Building flexibility, or real options, into a project can help manage this risk. Furthermore, the management flexibility of options has value, as the downside risk is reduced and the upside is increased. The case is based upon real options analysis for an enterprise data warehouse (EDW) and analytic customer relationship management (CRM) program at a major U.S. firm. The firm has been disguised as Global Airlines for confidentiality reasons. The data mart consolidation or EDW marginally meets the hurdle rate for the firm as analyzed using a traditional net present value (NPV) analysis. However, different tactical deployment strategies help mitigate the risk of the project by building options into the project, and the traditional NPV is expanded by the real option value. Students analyze the different deployment strategies using a binomial model compound option Excel macro, and calculate the volatility using Monte Carlo analysis in Excel. A step-by-step tutorial is provided to teach students how to accomplish the real options analysis for a simplified project, and this tutorial is easily generalized by students to the case scenario. In addition to the tactical options, the case also has the strategic growth option of analytic CRM. Students must therefore analyze both the tactical and strategic growth options and make a management recommendation on funding the project and also recommend an optimal deployment strategy to manage the project risk.The case teaches real options for technology projects. Students learn how to calculate real option values, where the key input of volatility is obtained by Monte Carlo analysis in Excel. Students also learn that the real option value is “real,” resulting from active management mitigating the risk of the project and improving the upside. Most important, students understand the difference between tactical vs. strategic growth options and the important management issues to consider.

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Research on the Real Option Value of Internet Enterprises-Based on the Managerial Ability and User Value

Proceedings of the 2020 3rd International Conference on Big Data Technologies ◽

10.1145/3422713.3422758 ◽

2020 ◽

Author(s):

Li Yadong ◽

Zhao Shuangyue ◽

Li Xiaozhe

Keyword(s):

Real Option ◽

Option Value ◽

Managerial Ability ◽

The Real ◽

User Value ◽

Real Option Value

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ENTRY-LEVEL ENTREPRENEURS AND THE CHOICE-OF-ENTITY CHALLENGE

Pittsburgh Tax Review ◽

10.5195/taxreview.2013.16 ◽

2013 ◽

Vol 10 (2) ◽

Author(s):

Emily Ann Satterthwaite

Keyword(s):

Real Option ◽

Lower Income ◽

Option Value ◽

Entry Level ◽

Deliberation Process ◽

New Business ◽

Tax Savings ◽

First Time ◽

Real Option Value ◽

Future Growth

For first-time, lower-income and credit-constrained entrepreneurs (“entry-level entrepreneurs”), the employment tax savings proffered by a longstanding tax shelter known as the “Sub-S Shelter” can be particularly salient. Such hypersalience is problematic from a policy perspective. It not only increases the costs and complexity of the entry-level entrepreneur’s deliberation process concerning the appropriate entity for her business, but it distorts her incentives to choose the entity that best supports her business’s future growth. I argue that because the hypersalience of the Sub-Shelter is likely to be more pronounced for entry-level entrepreneurs than for entrepreneurs with more experience or better access to capital, the burdens of the shelter are distributionally regressive. As an alternative to full-scale reforms that would eliminate the demand for the Sub-S Shelter but may be politically infeasible, I suggest that the shelter’s regressive hypersalience can be addressed by government measures to provide choice-of-entity information tailored to the needs and concerns of entry-level entrepreneurs. Such targeted information can mitigate the hypersalience of the Sub-S Shelter by underscoring the risks of relying on it, while highlighting the real option value of choosing a more flexible business entity such as an LLC. By nudging entry-level entrepreneurs towards neutrality in regard to their choice-of-entity decisions, this approach has the potential to improve both the efficiency and the equity of a key step in formalizing a new business.

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Real option value and random jumps: application of a simulation model

Applied Economics ◽

10.1080/00036840701335603 ◽

2009 ◽

Vol 41 (23) ◽

pp. 2977-2989 ◽

Cited By ~ 5

Author(s):

Susana Alonso-Bonis ◽

Valentín Azofra-Palenzuela ◽

Gabriel de la Fuente-Herrero

Keyword(s):

Simulation Model ◽

Real Option ◽

Option Value ◽

Random Jumps ◽

Real Option Value

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The Real Option Value of Operational and Managerial Flexibility in Global Supply Chain Networks

Risk Management ◽

10.1007/978-3-662-04008-9_10 ◽

2000 ◽

pp. 181-201 ◽

Cited By ~ 6

Author(s):

Arnd Huchzermeier

Keyword(s):

Supply Chain ◽

Real Option ◽

Global Supply Chain ◽

Option Value ◽

The Real ◽

Supply Chain Networks ◽

Managerial Flexibility ◽

Real Option Value

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Reporting of Real Option Value Related to ESG: Including Complementary Systems for Disclosure Incentives

International Journal of Financial Research ◽

10.5430/ijfr.v9n4p19 ◽

2018 ◽

Vol 9 (4) ◽

pp. 19 ◽

Cited By ~ 1

Author(s):

Nobuhito Ochi

Keyword(s):

Financial Reporting ◽

Information Disclosure ◽

Real Option ◽

Financial Information ◽

Strategic Decision ◽

Option Value ◽

Corporate Value ◽

Reporting Systems ◽

Disclosure Incentives ◽

Real Option Value

This paper aims to consider ways of granting disclosure incentives in order for the Signaling Theory to develop and encompass the Legitimacy Theory. First, the author discusses that ESG strategies for managing stakeholder externalities create real option value that leads to corporate value creation, both as business opportunities as well as appeals to a company’s legitimacy. At the same time as making real option thinking useful for strategic decision-making by management, it is necessary to structure non-financial information disclosure for convincing optionality related to controlling externalities from the viewpoint of investors.Second, at the stage where conditions are not met for companies able to autonomously undertake management with a view to externalities, the author discusses how supplementing incentives for issuing signals regarding differentiation from other companies in the same industry relating to controlling externalities is required in the disclosure of non-financial information in statutory reporting systems. On the other hand, since the materiality of financial reporting is centered on risks and opportunities for business, disclosure regulations are required separately for material social values. Events not originally related to corporate value can create incentive for the fulfillment of accountability of companies by the mediation of “negative intangibles” through reputation.

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A FUZZY MULTI-CRITERIA DECISION ANALYSIS APPROACH FOR RETAIL LOCATION SELECTION

International Journal of Information Technology & Decision Making ◽

10.1142/s0219622013500272 ◽

2013 ◽

Vol 12 (04) ◽

pp. 729-755 ◽

Cited By ~ 15

Author(s):

A. CAGRI TOLGA ◽

FATIH TUYSUZ ◽

CENGIZ KAHRAMAN

Keyword(s):

Real Option ◽

Evaluation Criteria ◽

Analytic Network Process ◽

Value Theory ◽

Preference Ranking ◽

Option Value ◽

Location Selection ◽

Real Options Valuation ◽

Retail Location ◽

Real Option Value

This paper proposes fuzzy multi-criteria decision-making approach integrated with fuzzy real option value theory. The applicability of the proposed method was shown on a real-world supermarket location selection problem. Based on the interviews with the experts, the evaluation criteria for retail location selection were identified. Then the network for fuzzy analytic network process (ANP) method was constructed. The fuzzy real option value for each alternative was calculated and used in the proposed approach as the representative of the financial dimension. Finally, the preference ranking of alternatives and the relative importance of the criteria were obtained. The significant contribution of the proposed approach is that it integrates the financial dimension (FROV) of the location problem methodologically with the multi-criteria characteristic (FANP) of the problem. Another importance of this study is the first usage of real options valuation in the area of location selection science.

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