MULTI-STAGE CAPITAL INVESTMENT OPPORTUNITIES AS COMPOUND REAL Options

Herath, Hemantha S. B.; Park, Chan S.

doi:10.1080/00137910208965021

Cited by 115 publications

(70 citation statements)

References 16 publications

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“…This paper also presents a parameterization for the trinomial tree with changing volatility based on cash flow simulation. Therefore this paper also extends research of Copeland & Antikarov (2001), Herath & Park (2002), Mun (2003), Brandão (2005a, 2005b, Godinho (2006), andHaahtela (2008), applying Monte Carlo simulation on cash flows to consolidate a highdimensional stochastic process of several correlated variables into a low-dimension (univariate) geometric Brownian motion process. The volatility parameter σ of the underlying asset is then estimated by calculating the standard deviation of the simulated probability distribution for the rate of return.…”

Section: Introductionmentioning

confidence: 99%

“…Several authors have suggested different variations of applying Monte Carlo simulation on cash flow calculation to estimate the volatility. The existing cash flow simulation based volatility estimation methods are the logarithmic present value approach of Copeland & Antikarov (2001) and Herath & Park (2002), conditional logarithmic present value approach of Brandão, , twolevel simulation and least-squares regression methods of Godinho (2006). All these methods are based on the same basic idea.…”

Section: Trinomial Tree Parameterization Based On a Simulated Cash Flmentioning

confidence: 99%

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Recombining Trinomial Tree for Real Option Valuation with Changing Volatility

Haahtela

2010

SSRN Journal

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This paper presents a recombining trinomial tree for valuing real options with changing volatility. The trinomial tree presented in this paper is constructed by simultaneously choosing such a parameterization that sets a judicious state space while having sensible transition probabilities between the nodes. The volatility changes are modeled with the changing transition probabilities while the state space of the trinomial tree is regular and has a fixed number of time and underlying asset price levels. The presented trinomial lattice can be extended to follow a displaced diffusion process with changing volatility, allowing also taking into account the level of the underlying asset price. The lattice can also be easily parameterized based on a cash flow simulation, using ordinary least squares regression method for volatility estimation. Therefore, the presented recombining trinomial tree with changing volatility is more flexible and robust for practice use than common lattice models while maintaining their intuitive appeal.JEL Classification: G31, G13, D81

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Section: Introductionmentioning

confidence: 99%

Section: Trinomial Tree Parameterization Based On a Simulated Cash Flmentioning

confidence: 99%

Recombining Trinomial Tree for Real Option Valuation with Changing Volatility

Haahtela

2010

SSRN Journal

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“…is a value of the standard deviation from the probability distribution of the underlying asset, Mean is the value of the mean from the probability distribution of the underlying asset, rand(x n ) is a random variable generator of the standardized normal distribution, and n is the number of trials from the second MCS. The rate of return can is expressed using Equation (2) [33]:…”

Section: Volatility Estimationmentioning

confidence: 99%

Probabilistic Cash Flow-Based Optimal Investment Timing Using Two-Color Rainbow Options Valuation for Economic Sustainability Appraisement

2017

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This research determines the optimal investment timing using real options valuation to support decision-making for economic sustainability assessment. This paper illustrates an option pricing model using the Black-Scholes model applied to a case project to understand the model performance. Applicability of the project to the model requires two Monte Carlo simulations to satisfy a Markov process and a Wiener process. The position of project developers is not only the seller of products, but it is also the buyer of raw materials. Real options valuation can be influenced by the volatility of cash outflow, as well as the volatility of cash inflow. This study suggests two-color rainbow options valuation to overcome this issue, which is demonstrated for a steel plant project. The asymmetric results of the case study show that cash outflow (put option) influences the value of the steel plant project more than cash inflow (call option) does of which the discussion of the results is referred to a sensitivity analysis. The real options valuation method proposed in this study contributes to the literature on applying the new model, taking into consideration that investors maximize project profitability for economic sustainable development.

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“…Lee and Paxson (2001) in their work modeled the stages of R&D ex-pense and the ultimate discovery using real sequential (compound) exchange American option models. Herath and Park (2002) investigated a multi-stage project setting, where each investment opportunity derived revenues from different markets but shared common technological resources. They extend the binomial lattice framework to model a multi-stage investment as a compound real option.…”

Section: Literature Reviewmentioning

confidence: 99%

Using Real Options for the Evaluation of Venture Projects

Баранов

Muzyko

2016

GADJAH MADA INT. J. BUS.

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This paper considers the peculiarities of the application of the real options method for assessing the economic efficiency of venture investments in innovative projects from the venture fund's position. The results of the practical use of the author's approach for the evaluation of venture investments with real options are analyzed. The paper shows the applicability of the real options concept to the valuation of the effectiveness of venture capital investments. The use of the real options method raises the accuracy of the estimation and enhances the instruments of the venture fund in evaluating the economic efficiency of innovative projects. Abstrak:Artikel ini membahas kekhasan aplikasi metode real options untuk menilai efisiensi ekonomis investasi ventura dalam berbagai proyek inovatif dari posisi dana ventura. Hasil penggunaan praktik pendekatan penulis terhadap evaluasi investasi ventura dengan real options dianalisa. Artikel ini menunjukkan aplikabilitas konsep real options untuk penilaian keefektifan investasi modal ventura. Penggunaan metode real options meningkatkan akurasi estimasi dan menambahkan instrumen dana ventura dalam mengevaluasi efisiensi ekonomis proyek inovatif.

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MULTI-STAGE CAPITAL INVESTMENT OPPORTUNITIES AS COMPOUND REAL Options

Cited by 115 publications

References 16 publications

Recombining Trinomial Tree for Real Option Valuation with Changing Volatility

Recombining Trinomial Tree for Real Option Valuation with Changing Volatility

Probabilistic Cash Flow-Based Optimal Investment Timing Using Two-Color Rainbow Options Valuation for Economic Sustainability Appraisement

Using Real Options for the Evaluation of Venture Projects

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