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Decision for the Optimal Location -- Waiting Timing Relationship in A Real Options Model

Author

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  • Chin-Tsai Lin

    (Graduate Institute of Business and Management, Yuanpei University of Science and Technology)

  • Cheng-Ru Wu

    (Graduate Institute of Business and Management, Yuanpei University of Science and Technology)

Abstract

The Cobb-Douglas production function with Abel's (1983) model is extended herein, and real options analysis for entry-exit decision making with Dixit's (1989) model under exchange rate uncertainty. A general form with the first order of degree homothetic production functions is also considered by the rule of decision-making in the proposed model. The firm is risk neutral and this study adopts the real options analysis for valuing the behavior of the transferable location. This investigation extends Lin and Wu (2002) from considering only threshold value to expected arrival time for exporter deciding to transfer the production location form domestic to foreign and Management's flexibility could be explained to Time's flexibility. Furthermore, a closed form solution of the di?erence of the expected arrival time for exporter deciding to transfer its location obtained by the real options analysis and NPV method, sensitivity analysis, and some characteristics of optimal production strategy are sought, providing for another way of thinking.

Suggested Citation

  • Chin-Tsai Lin & Cheng-Ru Wu, 2004. "Decision for the Optimal Location -- Waiting Timing Relationship in A Real Options Model," Annals of Economics and Finance, Society for AEF, vol. 5(2), pages 271-282, November.
    • Handle: RePEc:cuf:journl:y:2004:v:5:i:2:p:271-282
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    References listed on IDEAS

    as
    1. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    2. Avinash Dixit, 1989. "Hysteresis, Import Penetration, and Exchange Rate Pass-Through," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 104(2), pages 205-228.
    3. Bruce A. Blonigen, 2019. "Firm-Specific Assets and the Link Between Exchange Rates and Foreign Direct Investment," World Scientific Book Chapters, in: Foreign Direct Investment, chapter 3, pages 89-120, World Scientific Publishing Co. Pte. Ltd..
    4. KaSaundra M. Tomlin, 2000. "The Effects of Model Specification on Foreign Direct Investment Models: An Application of Count Data Models," Southern Economic Journal, John Wiley & Sons, vol. 67(2), pages 460-468, July.
    5. Grenadier, Steven R. & Weiss, Allen M., 1997. "Investment in technological innovations: An option pricing approach," Journal of Financial Economics, Elsevier, vol. 44(3), pages 397-416, June.
    6. Abel, Andrew B, 1983. "Optimal Investment under Uncertainty," American Economic Review, American Economic Association, vol. 73(1), pages 228-233, March.
    7. Alvarez, Luis H. R., 1999. "Optimal exit and valuation under demand uncertainty: A real options approach," European Journal of Operational Research, Elsevier, vol. 114(2), pages 320-329, April.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Cheng-Ru Wu & Chin-Tsai Lin & Huang-Chu Chen, 2009. "Integrated environmental assessment of the location selection with fuzzy analytical network process," Quality & Quantity: International Journal of Methodology, Springer, vol. 43(3), pages 351-380, May.

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    More about this item

    Keywords

    Batch process; Uncertainty; Real options; Expected arrival time; Operations research; Financial mathematics;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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