Financial derivatives and real options: effect of implementation time on real options valuation

Authors:
Harriet Black Nembhard;Leyuan Shi;Mehmet Aktan
Affiliations:
University of Wisconsin-Madison, Madison, WI;University of Wisconsin-Madison, Madison, WI;College of Engineering, Erzurum, Turkey
Venue:
Proceedings of the 34th conference on Winter simulation: exploring new frontiers
Year:
2002

Citing 6
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Abstract

Exercising real options often requires an implementation time, whereas financial options can be exercised instantly. Neglecting the implementation time needed to exercise a real option causes overvaluing that option. We develop lattice and Monte Carlo simulation techniques to value real option problems, where exercising the option requires an implementation time. We present the application of the proposed techniques on a global supply chain network problem with exchange rate uncertainty and value the flexibility to switch between manufacturing options for a firm that has operations in different countries.