scholarly journals The Sunk Cost and the Real Option Pricing Model

Complexity ◽  
2021 ◽  
Vol 2021 ◽  
pp. 1-12 ◽  
Author(s):  
Songsong Li ◽  
Yinglong Zhang ◽  
Xuefeng Wang
Keyword(s):  
Option Pricing ◽  
Real Options ◽  
Real Option ◽  
Value Function ◽  
Intrinsic Value ◽  
Pricing Model ◽  
Sunk Cost ◽  
Financial Options ◽  
Real Option Pricing ◽  
Option Pricing Model

Although the academic literature on real options has grown enormously over the past three decades, hitherto an accurate real option pricing model has not been developed for investment decision analyses. In this paper, we propose a real option pricing model based on sunk cost characteristics, which can estimate the value of real options more accurately. First, we explore the distinctive features that distinguish real options from financial options. The study shows that the distinguishing feature of the real options is the sunk cost, which does not exist in the financial options. Based on the sunk cost characteristic of real options, we find that the exercise conditions of real and financial options are different. Second, we introduce the sunk cost into the intrinsic value function of real options and establish a new real option pricing model. Finally, this paper also discusses the properties of the intrinsic value function and pricing model of real options. We find that the application of the Black–Scholes option pricing model will overestimate the value of real options.

scholarly journals Fuzzy Optimization of Option Pricing Model and Its Application in Land Expropriation

2014 ◽  
Vol 2014 ◽  
pp. 1-7 ◽  
Author(s):  
Aimin Heng ◽  
Qian Chen ◽  
Yingshuang Tan
Keyword(s):  
Option Pricing ◽  
Real Option ◽  
Fuzzy Variable ◽  
Fuzzy Optimization ◽  
Pricing Model ◽  
Land Expropriation ◽  
Fuzzy Environment ◽  
Real Option Pricing ◽  
Option Pricing Model ◽  
Current Price

Option pricing is irreversible, fuzzy, and flexible. The fuzzy measure which is used for real option pricing is a useful supplement to the traditional real option pricing method. Based on the review of the concepts of the mean and variance of trapezoidal fuzzy number and the combination with the Carlsson-Fuller model, the trapezoidal fuzzy variable can be used to represent the current price of land expropriation and the sale price of land on the option day. Fuzzy Black-Scholes option pricing model can be constructed under fuzzy environment and problems also can be solved and discussed through numerical examples.

An R&D Project Dealing with Mechanical Bits and Pieces in Real Option Analysis

2012 ◽  
Vol 472-475 ◽  
pp. 583-586
Author(s):  
Hua Luo ◽  
Ming Zi Zhu
Keyword(s):  
Decision Tree ◽  
Option Pricing ◽  
Real Options ◽  
Real Option ◽  
Practical Case ◽  
Pricing Model ◽  
Market Uncertainty ◽  
Real Option Analysis ◽  
Real Options Valuation ◽  
Option Pricing Model

The goal of this paper is to study the R&D project under incomplete information. We extend the multi-step quadrinomial option pricing model through a practical case, which is the R&D project of the machinery to deal with mechanical bits and pieces. We pricing the real options valuation (ROV) of the project and show a decision tree, which can provide managers flexible decisions to analyze technology and market uncertainty.

Compound Option Pricing Model Applied in Overseas Mineral Investment

2013 ◽  
Vol 734-737 ◽  
pp. 3332-3336
Author(s):  
Hua Luo ◽  
Wen Jing Yue
Keyword(s):  
Option Pricing ◽  
Real Option ◽  
Investment Decision ◽  
Pricing Model ◽  
Multi Stage ◽  
Investment Decision Making ◽  
Successful Probability ◽  
Real Option Pricing ◽  
Option Pricing Model ◽  
The Right

According to characteristics of selecting an overseas mineral project，such as a long period, high-risk and investment decisions in different phased, several stages is divided in the process of entire mineral investment decision-making. Using the method of the multi-stage real option pricing method, the compound option pricing model is to construct the investment in mineral based on the compound call option pricing formula ofGeskemodel. Taking a company for example, we introduce the probability of success in different stages for sensitivity analysis. Selecting the lower successful probability at the exploration stage and higher at the mining stage to illustrate the availability and stability of the model, helping investors to make the right choice.

scholarly journals Real options methodology in public-private partnership projects valuation

2014 ◽  
Vol 59 (200) ◽  
pp. 91-113 ◽  
Author(s):  
Biljana Rakic ◽  
Tamara Radjenovic
Keyword(s):  
Option Pricing ◽  
Real Options ◽  
Risk Sharing ◽  
Real Option ◽  
American Options ◽  
Pricing Model ◽  
Public And Private ◽  
Private Partnership ◽  
Toll Road ◽  
Option Pricing Model

PPP offers numerous benefits to both public and private partners in delivery of infrastructure projects. However this partnership also involves great risks which have to be adequately managed and mitigated. Private partners are especially sensitive to revenue risk, since they are mostly interested in the financial viability of the project. Thus they often expect public partners to provide some kind of risk-sharing mechanism in the form of Minimum Revenue Guarantees or abandonment options. The objective of this paper is to investigate whether the real option of abandoning the project increases its value. Therefore the binominal option pricing model and risk-neutral probability approach have been implemented to price the European and American abandonment options for the Build-Operate-Transfer (BOT) toll road investment. The obtained results suggest that the project value with the American abandonment option is greater than with the European abandonment option, hence implying that American options offer greater flexibility and are more valuable for private partners.

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