A real options framework for space mission design

Abstract

Abstract-a real options framework for use in space mission design is presented. Such a framework has potential application in architecting flexibility in certain mission designs with the objective of maximizing mission utility. It integrates economic principles of cost, return, risk, flexibility, and other concepts from Black-Scholes option pricing theory and the multiplicative binomial process. Options pricing theory provides an objective method for valuing flexibility in making future investment decisions based on new information becoming available; such flexibility may have great value in certain risky ventures. This flexibility in the future may or may not exist without additional investment. The development of investment strategies to create flexibility must include answering the question "how much can be invested to create the desired flexibility?" The answer must include a priori estimation of the value that the flexibility provides; in this application the real options framework becomes a powerful tool. The utility of this tool will be demonstrated through conceptual examples; these examples will also illustrate some limitations of the method. This work is by no means a comprehensive study. At best it attempts to demonstrate that there are techniques and ways of thinking -frameworks -that offer benefits for the complex process of mission design for an uncertain and often risky future.

Real option valuation of public sector R&D investments with a down-and-out barrier option

“…Reuter et al, 2012). In contrast, real options methods have not yet found their way into public sector decision making, and application of these methods to public sector projects has received only limited attention in the literature (Gray et al, 2005;Shishko et al, 2004). Nevertheless, national governments invest heavily in new technology development, and in the process are exposed to many of the same risks as those faced by a firm.…”

Grid resources pricing: A novel financial option based quality of service-profit quasi-static equilibrium model

“…Their method incorporates real option, fuzzy logic, and probability to account for the uncertainty involved in the valuation of future cash flow estimates. The results of the research efforts given in [11] and [18] have no formal reference to the QoS that characterize a decision system. Carlsson and Fullér [11] apply fuzzy methods to measure the level of decision uncertainties and did not price grid resources.…”

“…Current literature on real option approaches to valuing projects presents real options framework in eight categories [18]: option to defer, time-to-build option, option to alter, option to expand, option to abandon, option to switch, growth options, and multiple integrating options. Carlsson and Fullér in [11] apply a hybrid approach to valuing real options.…”

Addressing Flexibility during Process and Infrastructure Systems Conceptual Design: Real Options Perspective

“…Steps for real option integration in design process 2 The option to expand is explicitly considered, if the functions within the system-such as the trade-off between the amount of supply/production capacity and storage facilities as a means of moderating supply and demand uncertainties seem not enough. 3 The designer can use the option to defer thinking in making sure all unresolved uncertainties are resolved and successfully accounted for in the design.…”

“…For instance, in the process system engineering domain, attempts have been made in the application of the real options the batch distillation process design [1]. In the discrete manufacturing engineering area, the real option approach also is beginning to find wider application in the conceptual system design [2]. And in road and public infrastructure systems [3], [4] have applied the real option thinking and methodologies in the optimal system development and decision making.…”