Pricing R&D option with combining randomness and fuzziness

Authors:
Jinliang Zhang;Huibin Du;Wansheng Tang
Affiliations:
Institute of Systems Engineering, Tianjin University, Tianjin, China;Institute of Systems Engineering, Tianjin University, Tianjin, China;Institute of Systems Engineering, Tianjin University, Tianjin, China
Venue:
ICIC'06 Proceedings of the 2006 international conference on Intelligent computing: Part II
Year:
2006

Citing 4
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Abstract

Random fuzzy theory is introduced to evaluate the option value of R&D project in this paper. Based on a new theoretical insight, we develop a random fuzzy jump amplitude model to price R&D option. In classic stochastic jump amplitude model, the value of R&D option depends on the expected number of jumps and the expected size of the jumps. However, in practice, it is so hard to get enough data that the distribution functions of them are difficult to be confirmed accurately. So random fuzzy theory can deal with these problems better. In this paper, the number of jumps and the size of jumps are taken as random fuzzy variables, and investment costs and future cash flows are depicted as fuzzy variables. New research tools for option pricing of R&D project are developed and the capability of dealing with practical problems is enhanced.