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

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Author Info

  • 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)

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    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.

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    File URL: http://www.aeconf.net/Articles/Nov2004/aef050205.pdf
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    Bibliographic Info

    Article provided by Society for AEF in its journal Annals of Economics and Finance.

    Volume (Year): 5 (2004)
    Issue (Month): 2 (November)
    Pages: 271-282

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    Handle: RePEc:cuf:journl:y:2004:v:5:i:2:p:271-282

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    Related research

    Keywords: Batch process; Uncertainty; Real options; Expected arrival time; Operations research; Financial mathematics;

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    1. 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.
    2. 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.
    3. Blonigen, Bruce A, 1997. "Firm-Specific Assets and the Link between Exchange Rates and Foreign Direct Investment," American Economic Review, American Economic Association, vol. 87(3), pages 447-65, June.
    4. KaSaundra M. Tomlin, 2000. "The Effects of Model Specification on Foreign Direct Investment Models: An Application of Count Data Models," Southern Economic Journal, Southern Economic Association, vol. 67(2), pages 460-468, July.
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