Investment Decision-making Using Optional Models [Hardcover]

In order to create value, companies must allocate their resources effectively and evaluate investment alternatives. This book examines, from a theoretical and empirical point of view, how managerial flexibility can be integrated into investment decisions through the optional approach. Unlike the traditional net present value method, the actual options take into account indeterminate elements. These lead to unpredictable cash flows at the time of the investment decision, especially in the context of complex and risky projects. The book puts into perspective the use of optional models and their interactions. The different categories of options are the subject of practical applications, through analysis of investment decisions where uncertainty is growing. Therefore, studies make it possible to consider the flexible nature of investment choices by integrating new information and risk over time.

Introduction ix

Chapter 1. Risk and Flexibility Integration in Valuation 1

1.1. Introduction 1

1.2. The scope of real options 2

1.2.1. The concept of real options 3

1.2.2. Empirical use of real options 7

1.2.3. Paradigms in options 12

1.3. Valuation of investments by real options 20

1.3.1. Optional valuation of investments in a discrete-time approach 20

1.3.2. Optional valuation of investments in a continuous-time approach 28

1.4. Option model extensions by incorporating new parameters (Levyne and Sahut 2008) 35

1.4.1. Stochastic volatility 36

1.4.2. Transaction costs and models with jumps 39

1.4.3. Option pricing 41

1.5. Conclusion 44

Chapter 2. Optional Modeling of Investment Choices and Surplus Value Linked to the Option to Invest