scholarly journals Economic Evaluation of National Highway Construction Projects using Real Option Pricing Models

2014 ◽  
Vol 16 (1) ◽  
pp. 75-89
Author(s):  
Seong-Yun Jeong ◽  
Ji-Pyo Kim
Keyword(s):  
Economic Evaluation ◽  
Option Pricing ◽  
Construction Projects ◽  
Real Option ◽  
Highway Construction ◽  
Pricing Models ◽  
Real Option Pricing ◽  
National Highway

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.

Real option pricing with mean-reverting investment and project value

2013 ◽  
Vol 19 (7-8) ◽  
pp. 625-644 ◽  
Author(s):  
Sebastian Jaimungal ◽  
Max O. de Souza ◽  
Jorge P. Zubelli
Keyword(s):  
Option Pricing ◽  
Real Option ◽  
Real Option Pricing

scholarly journals Replacement Analysis of Mutually Exclusive Projects of Unequal Lives Using Kelly Specific Real Option Criterion

2021 ◽  
Vol 2021 ◽  
pp. 1-9
Author(s):  
Gyutai Kim ◽  
Seong-Joon Kim ◽  
Jong-Ho Shin
Keyword(s):  
Option Pricing ◽  
Time Horizon ◽  
Real Option ◽  
Traditional Approach ◽  
Kelly Criterion ◽  
Engineering Economics ◽  
Real Option Pricing ◽  
The Interest Rate ◽  
Binomial Lattice ◽  
Selection Of

This paper presents a model to address the uncertainty inherent in replacement problems, whereby a firm must select between mutually exclusive projects of unequal lifespans by applying the Kelly criterion (which is not well known to the engineering economics community) within a binomial lattice option-pricing environment. Assuming that only the interest rate, among many factors, is uncertain, Brown and Davis performed an economic analysis of this problem by employing a real option-pricing method and argued that their model yields results opposite to those yielded by the traditional approach. However, the results yielded by the model proposed herein are consistent with those by the traditional approach, unlike Brown and Davis’s model. The conclusion is that since the investment time horizon is infinite, a firm rationale pertaining to the selection of the best method for the investment problem of such types does not exist.

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