We compare the use of stochastic dynamic programming (SDP), Neural Networks and a simple approximation rule for calculating the real option value of a flexible production system. While SDP yields the best solution to the problem, it is computationally prohibitive for larger settings. We test two approximations of the value function and show that the results are comparable to those obtained via SDP. These methods have the advantage of a high computational performance and of no restrictions on the type of process used. Our approach is not only useful for supporting large investment decisions, but it can also be applied in the case of routine decisions like the determination of the production program when stochastic profit margins occur. (author's abstract) / Series: Working Papers SFB "Adaptive Information Systems and Modelling in Economics and Management Science"

Spending on investments in integrative information systems (IIS) has considerably risen during the last few years due to a high need for linking various information systems. The demand for integrating the systems stems from developments like mergers and acquisitions and is typically satisfied in practice using Enterprise Application Integration solutions, Enterprise Resource Planning systems, Portals, or Data Warehouses. For the valuation of such an investment previous literature recommends the use of a real options analysis (ROA) since traditional capital budgeting methods such as the Net Present Value underestimate its value. Contrary, the ROA is able to conveniently account for managerial flexibility, represented by the possibility to implement follow-on opportunities, generated by the IIS. However, in practice ROA suffers from a lack of appliance mainly because of its complexity. This thesis precisely closes this gap and develops a simplified process model for a ROA by exactly tailoring the broad real options concept to the requirements of an investment valuation of IIS. For that, it reviews option pricing models from the financial world as well as previous research in the area of ROA and creates the desired model by conducting a ROA for four case studies in detail. The study reveals new findings concerning the question of how a decision-maker can apply the real options method and at the same time, when he/she is able to abandon a detailed ROA or a ROA at all. (author's abstract)

Prior research on the strength of embeddedness ties in strategic networks in influencing innovation performance has produced inconsistent conclusions. In this paper, drawing on an investment perspective on firms¡¦ decision behavior, we argue that the ¡§control benefits¡¨¡Xanother characteristics of strategic networks¡Xalso affects firms¡¦ innovation performance. According to previous research, we adopt the speed of ¡§patent application¡¨ and ¡§market introduction of a new product¡¨ to measure innovation performance. Furthermore, we divide firms¡¦ innovation strategies into ¡§apply for a patent and introduce the new product to market later¡¨, ¡§patent the innovation and market introduction immediately¡¨ as well as ¡§introduce the new product to market and apply for a patent later¡¨. We examine the relationship between the strength of enbeddedness ties and firms¡¦ innovation performance using the theoretical frames of game theory and real options. After the analysis of Cournot duopoly game model and real options approach, several findings are acquired as follows: (a) the higher the strength of embeddedness ties, the more likely the firm is to abandon the innovation strategy ¡§apply for a patent and introduce the new product to market later¡¨ and adopt innovation strategies ¡§patent the innovation and market introduction immediately¡¨ or ¡§introduce the new product to market and apply for a patent later¡¨; (b) if the firm adopts the innovation strategy ¡§apply for a patent and introduce the new product to market later¡¨, then the strength of embeddedness ties has a positive effect on the speed of market introduction of the new product, but the relationship between the strength of embeddedness ties and the speed of patent application is not sure; (c) if the firm adopts innovation strategies ¡§patent the innovation and market introduction immediately¡¨ or ¡§introduce the new product to market and apply for a patent later¡¨, then the strength of embeddedness ties has both positive and negative impact on the speed of ¡§patent application¡¨ and ¡§market introduction of a new product¡¨, and therefore the relationship between the strength of embeddedness ties and the innovator¡¦s innovation performance is indeterminable. The research findings indicate that the innovator may delay the application for patent or postpone the launching of a new product because of the ¡§control benefits¡¨ derived from different strength of embeddedness ties. These results have broad implications for future research on strategic networks and innovation.

<p>Background: Businesses are traditionally valued with the so called Discounted Cash Flow-model. When valuing newly-started businesses, surrounded by high uncertainty, and whose capital mostly consists of unrealized business opportunities, the Discounted Cash Flow-model needs to be complemented if the total value of the business is to be captured. A valuation with the help of real options is capable of valuing these unrealized opportunities, which often exist in newly-started businesses. The unrealized opportunities are to be found in the business plan of the business, why this needs to be valued to capture the total value of a newly-started business. </p><p>Purpose: To demonstrate what the use of real options can result in when valuing businesses. </p><p>Realization: The fulfillment of the purpose was achieved by gathering information from a case company. Thereafter the case company was valued by putting the gathered information and made assumptions into suitable theoretical valuation models. Finally, an evaluation of the result was made. </p><p>Findings: A valuation model, which includes real options can give a higher value on the business, but to beable to use real options one need to undertake some assumptions. These make the real option value uncertain to some extent. Real options can however function as a strategic tool. Firstly, the estimated option values can serve as indicators as to which decision to undertake within the business. Secondly, using real options can change the business management’s way to look at what creates value.</p>

This study is to establish a binomial lattice method to apply real options theory to valuation and decision making in the petroleum exploration and production industry with a specific focus on the switching time from primary to water flooding oil recovery. First, West Texas Intermediate (WTI) historical oil price evolution in the past 25 years is studied and modeled with the geometric Brownian motion (GBM) and one-factor mean reversion price models to capture the oil price uncertainty. Second, to conduct real options evaluation, specific reservoir simulations are designed and oil production profile for primary and water flooding oil recovery for a synthetic onshore oil reservoir is generated using UTCHEM reservoir simulator. Third, a cash flow model from producing the oil reservoir is created with a concessionary fiscal system. Finally, the binomial lattice real options evaluation method is established to value the project with flexibility in the switching time from primary to water flooding oil recovery under uncertain oil prices. The research reaches seven conclusions: 1) for the GBM price model, the assumptions of constant drift rate and constant volatility do not hold for WTI historical oil price; 2) one-factor mean reversion price model is a better model to fit the historical WTI oil prices than the GBM model; 3) the evolution of historical WTI oil prices from January 2, 1986 to May 28, 2010 was according to three price regimes with different long run prices; 4) the established real options evaluation method can be used to identify the best time to switch from primary to water flooding oil recovery using stochastic oil prices; 5) with the mean reversion oil price model and the most updated cost data, the real options evaluation method finds that the water flooding switching time is earlier than the traditional net present value (NPV) optimizing method; 6) the real options evaluation results reveals that most of time water flooding should start when oil price is high, and should not start when oil price is low; and 7) water flooding switching time is sensitive to oil price model to be used and to the investment and operating costs. / text

This thesis investigates how estimates of reservoir compartmentalization impact facility sizing decisions and the degree to which inaccurate estimates destroy project value. An uncertainty analysis workflow is proposed and an asset development optimization model is specified to simulate the decision making process during concept selection. The model endogenizes drilling decisions and includes a real option to expand facility capacity after the uncertain variables are realized. The value of information analysis suggests that cost of erroneous estimates of reservoir compartmentalization is significant and can reduce asset value by more than 30%. We also find that the negative impacts are larger when the degree of compartmentalization is underestimated (too optimistic) than when it is overestimated (too pessimistic). / text

This dissertation research focuses on modeling and evaluating multivariate uncertainties and the dependency between the uncertainties. Managing risk and making strategic decisions under uncertainty is critically important for both individual and corporate success. In this dissertation research, we present two new methodologies, the implied binomial tree approach and the dependent decision tree approach, to modeling multivariate decision making problems with practical applications in real options valuation. First, we present the implied binomial tree approach to consolidate the representation of multiple sources of uncertainty into univariate uncertainty, while capturing the impact of these uncertainties on the project’s cash flows. This approach provides a nonparametric extension of the approaches in the literature by allowing the project value to follow a generalized diffusion process in which the volatility may vary with time and with the asset prices, therefore offering more modeling flexibility. This approach was motivated by the Implied Binomial Tree (IBT) approach that is widely used to value complex financial options. By constructing the implied recombining binomial tree in a way so as to be consistent with the simulated market information, we extended the finance-based IBT method for real options valuation — when the options are contingent on the value of one or more market related uncertainties that are not traded assets. Further, we present a general framework based on copulas for modeling dependent multivariate uncertainties through the use of a decision tree. The proposed dependent decision tree model allows multiple dependent uncertainties with arbitrary marginal distributions to be represented in a decision tree with a sequence of conditional probability distributions. This general framework could be naturally applied in decision analysis and real options valuations, as well as in more general applications of dependent probability trees. While this approach to modeling dependencies can be based on several popular copula families as we illustrate, we focus on the use of the normal copula and present an efficient computational method for multivariate decision and risk analysis that can be standardized for convenient application. / text

Although existing cross-border M&A research suggests that national pride is associated with higher bid premiums, the underlying rationale behind these national pride bids is unclear. We study two plausible explanations for this phenomenon: payment for a prearranged expansion strategy (real options) and bidders’ lack of experience in a target country (organization learning). Using a sample of cross-border acquisitions of developed-country targets by developing-country acquirers, we perform an extensive media search to identify 36 acquisitions that involve national pride. We divide these 36 acquisitions into those with zero bids completed in that particular country prior to the national pride bid (non-foothold bidders) and those with at least one bid completed in that country before the national pride acquisition (foothold bidders). We find that the higher premium paid in so-called national pride bids is primarily attributable to the non-foothold acquirers. Since non-foothold characteristics can proxy for either lack of experience or higher value of embedded real options, or both, we perform further tests which confirm that the higher premium of national pride bids can be attributed to both channels, supporting both organizational learning theory and real options explanation. We further demonstrate that national pride acquirers underperform operationally post-acquisition, and such underperformance is also attributable to the non-foothold acquirers. One explanation for this finding is the lack of prior acquisition experience of non-foothold bidders.

Many of the grid compute resources (CPU cycles, network bandwidths, computing power, processor times, and software) exist as non-storable commodities, which we call grid compute commodities (gcc) and are distributed geographically across organizations. These organizations have dissimilar resource compositions and usage policies, which makes pricing grid resources and guaranteeing their availability a challenge. Several initiatives (Globus, Legion, Nimrod/G) have developed various frameworks for grid resource management. However, there has been a very little effort in pricing the resources. In this thesis, we propose financial option based model for pricing grid resources by devising three research threads: pricing the gcc as a problem of real option, modeling gcc spot price using a discrete time approach, and addressing uncertainty constraints in the provision of Quality of Service (QoS) using fuzzy logic. We used GridSim, a simulation tool for resource usage in a Grid to experiment and test our model. To further consolidate our model and validate our results, we analyzed usage traces from six real grids from across the world for which we priced a set of resources. We designed a Price Variant Function (PVF) in our model, which is a fuzzy value and its application attracts more patronage to a grid that has more resources to offer and also redirect patronage from a grid that is very busy to another grid. Our experimental results show that the application of the PVF has helped achieve equilibrium between users satisfaction measured as QoS and recovery of the infrastructure investment made by the providers. In the absence of pricing benchmarks, we setup Commodity Base Prices (CBP) and then integrated our PVF and CBP with GridSim to price grid compute resources. In summary, this thesis provides the design of a model to price grid compute resources using financial options theory. The model achieves mutual benefit for users and providers in the grid environment. The mutual benefit is expressed in terms of QoS to the users and recovery of investments on the grid infrastructure for the providers. This thesis has opened up many different opportunities for further research especially in the era of enterprise computing with clouds.

Finansvärlden har drabbas av flertalet olika ekonomiska kriser de senaste åren och sedan dess råder det osäkerhet i världsekonomin. Osäkerheten gör att de traditionella investeringsbedömningsmetoder som grundar sig i diskonterade kassaflöden blivit allt mer kritiserade och anses som otillräckliga för att göra ett bra investeringsbeslut. Med hjälp av reala optioner kan osäkerheten minska och på längre sikt göra mer gynnsamma investeringar.  Allmännyttiga kommunala bostadsaktiebolag har den unika situationen att de har ramar och regler som gör att de måste göra långsiktiga investeringar och inte kan byta sitt geografiska läge, till skillnad från privata bostadsbolag. I denna unika situation måste det allmännyttiga kommunala bostadsaktiebolaget säkerställa att bolaget har möjligheten och flexibiliteten att göra investeringar som är lönsamma för bolaget. Därför kom vi fram till problemformuleringen: Hur kan reala optioner påverka investeringsbeslut i allmännyttiga kommunala bostadsbolag? Syftet med studien var att beskriva och analysera hur reala optioner kan påverka ett investeringsbeslut i allmännyttiga kommunala bostadsaktiebolag och förklara hur allmännyttiga kommunala bostadsaktiebolag använder sig av reala optioner.  Metoden för studien är en kvalitativ metod där vi intervjuade tre olika allmännyttiga kommunala bostadsaktiebolag i Halland och Nordvästra Skåne. Resultatet av studien blev att reala optioner påverkar investeringsbeslut i allmännyttiga kommunala bostadsaktiebolag. Samhällseffekter som investeringen tillför kan göra att kommunen på lång sikt får en befolkningstillväxt och ekonomisk tillväxt som väger upp förlusten i den enskilda investeringen. Flexibiliteten och möjligheten finns i investeringen som den bidrar med till samhället och kan därmed påverka ett investeringsbeslut på så sätt att även om kalkylen inte visar på ett positivt nettonuvärde genomförs den ändå.