scholarly journals A Fuzzy Pay-Off Method for Real Option Valuation

2009 ◽  
Vol 2009 ◽  
pp. 1-14 ◽  
Author(s):  
Mikael Collan ◽  
Robert Fullér ◽  
József Mezei
Keyword(s):  
Real Option ◽  
Fuzzy Numbers ◽  
Academic Research ◽  
New Method ◽  
Option Valuation ◽  
Modeling And Analysis ◽  
Real Option Analysis ◽  
Valuation Model ◽  
Real Option Valuation ◽  
Different Types

Real option analysis offers interesting insights on the value of assets and on the profitability of investments, which has made real options a growing field of academic research and practical application. Real option valuation is, however, often found to be difficult to understand and to implement due to the quite complex mathematics involved. Recent advances in modeling and analysis methods have made real option valuation easier to understand and to implement. This paper presents a new method (fuzzy pay-off method) for real option valuation using fuzzy numbers that is based on findings from earlier real option valuation methods and from fuzzy real option valuation. The method is intuitive to understand and far less complicated than any previous real option valuation model to date. The paper also presents the use of number of different types of fuzzy numbers with the method and an application of the new method in an industry setting.

scholarly journals A real option approach for the valuation of switching output flexibility in residential property investment

2018 ◽  
Vol 23 (2) ◽  
pp. 133-151 ◽  
Author(s):  
Kwabena Mintah ◽  
David Higgins ◽  
Judith Callanan
Keyword(s):  
Real Options ◽  
Real Option ◽  
Economic Value ◽  
Management Tool ◽  
Residential Property ◽  
Option Valuation ◽  
Content Type ◽  
Real Option Analysis ◽  
Real Option Valuation ◽  
Mixed Use

Purpose Uncertainties in residential property investment performance require that real estate assets are designed in a flexible manner to respond to impacts of market dynamics. Though estimating the cost of flexibility is straightforward, assessing the economic value of flexibility is not. The purpose of this study is to explore the potential practical application of real option analysis to determine the economic value of a switching output flexibility embedded in a residential property investment in Australia. The study involves the exploration of an optimal strategy for investment in a residential development through real option analysis and valuation of a mixed use investment. Design/methodology/approach The real option valuation model developed by McDonald and Siegel (1986) is adopted for the evaluation because the switching output flexibility is likened to a perpetual American call option with dividend payout. Findings Through real option analysis, the economic value of switching output flexibility of the mixed use building was determined to be higher than the initial upfront costs. Moreover, a payoff of about $4million was determined to be the value of the switching output flexibility, therefore justifying upfront investments in flexibility as an uncertainty and risk management tool. Practical implications This application is an important demonstration of the practical use of options pricing techniques (real options analysis) and delivers further evidence needed to support the adoption of real option valuation in practice. Flexibility can also enhance risks and uncertainty management in residential property investment better than the adjustment of discount rates. Originality/value There is limited evidence on the use of real options techniques for the valuation of switching output flexibility in practice, and this comes as an original application; both the case study and data are all initial applications of switching flexibility in the Australian property market.

scholarly journals Comparison of the Datar-Mathews Method and the Fuzzy Pay-Off Method through Numerical Results

2016 ◽  
Vol 2016 ◽  
pp. 1-7 ◽  
Author(s):  
Mariia Kozlova ◽  
Mikael Collan ◽  
Pasi Luukka
Keyword(s):  
Monte Carlo Simulation ◽  
Monte Carlo ◽  
Simulation Model ◽  
Real Option ◽  
Fuzzy Numbers ◽  
Numerical Results ◽  
Option Valuation ◽  
The Real ◽  
Valuation Methods ◽  
Real Option Valuation

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.

Cash flow estimation for real option analysis using Margrabe's model

2006 ◽  
Vol 56 (2) ◽  
pp. 183-194
Author(s):  
György Andor ◽  
Gábor Bóta
Keyword(s):  
Cash Flow ◽  
Real Option ◽  
Cash Flows ◽  
Option Valuation ◽  
Real Option Analysis ◽  
Flow Estimation ◽  
Capital Budget ◽  
Real Option Valuation ◽  
Exercise Price ◽  
Black Scholes

This paper looks at how the parameters for real option analysis can be extracted from the general capital budget of a project and discusses how the estimated cash flows of a general project can be used for a real option analysis. A project is described where it is possible to stop the business operation in case of predicting a loss for the next year. Our model shows how the cash flow of the period influenced by the option-like decision has to be separated in order to get the exercise price and the price of the underlying asset for real option valuation. Besides providing arguments against the suitability of the general Black-Scholes formula for real option situations, the paper also shows how Margrabe's exchange option valuation formula may be used, and how the volatility as a parameter of this model can be calculated from the data available about the project.

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