REAL OPTIONS: BATCH PROCESS AND MARKET ENTRY/EXIT DECISIONS UNDER UNCERTAINTY

2004 ◽  
Vol 21 (01) ◽  
pp. 35-52 ◽  
Author(s):  
CHIN-TSAI LIN ◽  
CHENG-RU WU
Keyword(s):  
Dynamic Programming ◽  
Exchange Rate ◽  
Stochastic Optimization ◽  
Control Problem ◽  
Real Options ◽  
Market Entry ◽  
Rational Expectations ◽  
Batch Process ◽  
Production Model ◽  
Optimization Control

Under uncertainty of exchange rate, we extend the batch process production model of Lin et al. (2002) by considering an export-oriented manufacturer making decisions to switch freely between domestic and foreign locations. The export-oriented manufacturer is risk neutral and has rational expectations. We use dynamic programming and Lagrange multiplies for a stochastic optimization control problem to get the productive value of exporter produces in domestic and foreign locations. Next, the export-oriented manufacturer can make decision regarding the optimal entry (exit) trigger for transferable locations wherever the product locations are. It provides the supplier with another way to make decisions.

OPTIMIZING LOCATION AMONG N-COUNTRIES UNDER EXCHANGE RATE UNCERTAINTY: APPLYING REAL OPTIONS

2007 ◽  
Vol 24 (01) ◽  
pp. 21-44 ◽  
Author(s):  
CHENG-RU WU ◽  
CHIN-TSAI LIN
Keyword(s):  
Exchange Rate ◽  
Real Options ◽  
Process Model ◽  
Closed Form Solution ◽  
Threshold Value ◽  
Batch Process ◽  
Production Model ◽  
Asia Pacific ◽  
Extended Model ◽  
Constant Elasticity

This study considers the effects of one real exchange rate on strategies that govern locations of production by firms that are entering N - 1 foreign countries. The batch process production model (Lin, CT and CR Wu (2004a). Asia Pacific Journal of Operational Research, 21, 35–52) which considers two locations of production, one in each of two countries is extended to develop a decision valuation model to choose the two optimal locations to produce a good — one in each country. This extended model applies the real options approach (ROA) to determine the value of locating production in N countries. Moreover, a closed-form solution to the Continuous-Time Model Optimization Problem is derived. The optimal entry threshold value of a firm from country-0 to country-(N - 1) is calculated; a sensitivity analysis is performed, and some characteristic strategies of the operating method for the Constant Elasticity of Substitution (CES) batch process model among N countries are determined. Next, we can get optimal entry threshold value for Cobb-Douglas, perfect substitution and Leontief by CES production function. A useful summary of insights is provided for global managers.

scholarly journals Build to order and entry/exit strategies under exchange rate uncertainty

2004 ◽  
Vol 14 (2) ◽  
pp. 193-208
Author(s):  
Chin-Tsai Lin ◽  
Cheng-Ru Wu
Keyword(s):  
Exchange Rate ◽  
Rational Expectations ◽  
Net Present Value ◽  
Threshold Value ◽  
Production Model ◽  
Entry And Exit ◽  
Present Value ◽  
Exchange Rate Uncertainty ◽  
Production Location ◽  
Douglas Production Function

Under uncertainty of exchange rate, we extend the build to order production model of Lin et al. (2002) by considering the export-oriented manufacturer to make decisions to switch production location freely between domestic and foreign ones. The export-oriented manufacturer is risk neutral and has rational expectations. When we transfer the production location from domestic (foreign) to foreign (domestic), and the production location transferring cost and the drift of real exchange rate are both equal to zero, then the optimal entry and exit threshold value of Cobb-Douglas production function are equal, no matter whether we use real options or net present value method. Thus export-oriented manufacturer can make decisions at the optimal transfer threshold value for transferable locations wherever the production locations are. It provides the export-oriented manufacturer with another way of thinking.

scholarly journals Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?

2006 ◽  
Vol 96 (3) ◽  
pp. 552-576 ◽  
Author(s):  
Philippe Bacchetta ◽  
Eric van Wincoop
Keyword(s):  
Exchange Rate ◽  
Empirical Evidence ◽  
Rational Expectations ◽  
Exchange Rate Volatility ◽  
Order Flow ◽  
Macroeconomic Variables ◽  
Symmetric Information ◽  
Macroeconomic Fundamentals ◽  
The Exchange Rate ◽  
Exchange Rate Changes

Empirical evidence shows that most exchange rate volatility at short to medium horizons is related to order flow and not to macroeconomic variables. We introduce symmetric information dispersion about future macroeconomic fundamentals in a dynamic rational expectations model in order to explain these stylized facts. Consistent with the evidence, the model implies that (a) observed fundamentals account for little of exchange rate volatility in the short to medium run, (b) over long horizons, the exchange rate is closely related to observed fundamentals, (c) exchange rate changes are a weak predictor of future fundamentals, and (d) the exchange rate is closely related to order flow.

Urban Oversaturated Traffic Network Control Based on Preference Multi-Objective Compatible Optimization Control

2011 ◽  
Vol 317-319 ◽  
pp. 1373-1384 ◽  
Author(s):  
Juan Chen ◽  
Chang Liang Yuan
Keyword(s):  
Control Problem ◽  
Control Algorithm ◽  
Control Method ◽  
Network Control ◽  
Feasible Region ◽  
Traffic Network ◽  
Total Delay ◽  
Multi Objective ◽  
Optimization Control ◽  
Objective Control

To solve the traffic congestion control problem on oversaturated network, the total delay is classified into two parts: the feeding delay and the non-feeding delay, and the control problem is formulated as a conflicted multi-objective control problem. The simultaneous control of multiple objectives is different from single objective control in that there is no unique solution to multi-objective control problems(MOPs). Multi-objective control usually involves many conflicting and incompatible objectives, therefore, a set of optimal trade-off solutions known as the Pareto-optimal solutions is required. Based on this background, a modified compatible control algorithm(MOCC) hunting for suboptimal and feasible region as the control aim rather than precise optimal point is proposed in this paper to solve the conflicted oversaturated traffic network control problem. Since it is impossible to avoid the inaccurate system model and input disturbance, the controller of the proposed multi-objective compatible control strategy is designed based on feedback control structure. Besides, considering the difference between control problem and optimization problem, user's preference are incorporated into multi-objective compatible control algorithm to guide the search direction. The proposed preference based compatible optimization control algorithm(PMOCC) is used to solve the oversaturated traffic network control problem in a core area of eleven junctions under the simulation environment. It is proved that the proposed compatible optimization control algorithm can handle the oversaturated traffic network control problem effectively than the fixed time control method.

Nonlinear Stochastic Optimal Control of MDOF Partially Observable Linear Systems Excited by Combined Harmonic and Wide-Band Noises

2019 ◽  
Vol 19 (03) ◽  
pp. 1950019 ◽  
Author(s):  
R. C. Hu ◽  
X. F. Wang ◽  
X. D. Gu ◽  
R. H. Huan
Keyword(s):  
Optimal Control ◽  
Dynamic Programming ◽  
Control Problem ◽  
Linear Systems ◽  
Control Strategy ◽  
Stochastic Optimal Control ◽  
Wide Band ◽  
Dynamic Programming Principle ◽  
Stochastic Dynamic ◽  
Partially Observable

In this paper, nonlinear stochastic optimal control of multi-degree-of-freedom (MDOF) partially observable linear systems subjected to combined harmonic and wide-band random excitations is investigated. Based on the separation principle, the control problem of a partially observable system is converted into a completely observable one. The dynamic programming equation for the completely observable control problem is then set up based on the stochastic averaging method and stochastic dynamic programming principle, from which the nonlinear optimal control law is derived. To illustrate the feasibility and efficiency of the proposed control strategy, the responses of the uncontrolled and optimal controlled systems are respectively obtained by solving the associated Fokker–Planck–Kolmogorov (FPK) equation. Numerical results show the proposed control strategy can dramatically reduce the response of stochastic systems subjected to both harmonic and wide-band random excitations.

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