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A Real Options and Game-Theoretic Approach to

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  • Han T. J. Smit
  • L. A. Ankum
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Abstract

An investment strategy encompasses a sequence of tactical investment projects, of which several may yield a low return when considered in isolation. Some low-return investment projects can actually be seen as the first links in a chain of subsequent investment decisions. The value of these projects does not derive so much from their expected cash inflows but rather from the option to invest in a follow-up project for future commercial exploitation. For example, an R&D project, the development of a new technology, or entry into a new geographical market may create future investment opportunities. In strategy, these projects are often compared with options for future company growth.

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Bibliographic Info

Article provided by Financial Management Association in its journal Financial Management.

Volume (Year): 22 (1993)
Issue (Month): 3 (Fall)
Pages:

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Handle: RePEc:fma:fmanag:smit93

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Cited by:
  1. Li, Yong & James, Barclay & Madhavan, Ravi & Mahoney, Joseph T., 2006. "Real Options: Taking Stock and Looking Ahead," Working Papers 06-0114, University of Illinois at Urbana-Champaign, College of Business.
  2. Smit, Han T.J. & Trigeorgis, Lenos, 2006. "Real options and games: Competition, alliances and other applications of valuation and strategy," Review of Financial Economics, Elsevier, vol. 15(2), pages 95-112.
  3. Pawlina, G. & Kort, P.M., 2001. "Strategic Capital Budgeting: Asset Replacement Under Uncertainty," Discussion Paper 2001-4, Tilburg University, Center for Economic Research.
  4. Martzoukos, Spiros H & Zacharias, Eleftherios, 2008. "Real Option Games with R&D and Learning Spillovers," MPRA Paper 12686, University Library of Munich, Germany.
  5. Reiss, Ariane, 1998. "Investment in Innovations and Competition: An Option Pricing Approach," The Quarterly Review of Economics and Finance, Elsevier, vol. 38(3, Part 2), pages 635-650.
  6. Li, Yong & Mahoney, Joseph T., 2011. "When are venture capital projects initiated?," Journal of Business Venturing, Elsevier, vol. 26(2), pages 239-254, March.
  7. Grzegorz Pawlina & Peter M. Kort, 2006. "Real Options in an Asymmetric Duopoly: Who Benefits from Your Competitive Disadvantage?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(1), pages 1-35, 03.
  8. Murto, Pauli & Nasakkala, Erkka & Keppo, Jussi, 2004. "Timing of investments in oligopoly under uncertainty: A framework for numerical analysis," European Journal of Operational Research, Elsevier, vol. 157(2), pages 486-500, September.
  9. Ulrich Pape & Stephan Schmidt-Tank, 2005. "Valuing Joint Ventures Using Real Options," Finance 0503030, EconWPA.
  10. Hommel, Ulrich, 2003. "Financial versus operative hedging of currency risk," Global Finance Journal, Elsevier, vol. 14(1), pages 1-18, May.
  11. Gomes Santana Félix, Elisabete, 2003. "Opções reais: tipologias e sua avaliação
    [Real options: typologies and its evaluation]
    ," MPRA Paper 6186, University Library of Munich, Germany.
  12. Ko, Chuan-Chuan & Lin, Tyrone T. & Yang, Chyan, 2011. "The venture capital entry model on game options with jump-diffusion process," International Journal of Production Economics, Elsevier, vol. 134(1), pages 87-94, November.
  13. Rosalba Padalino, 2004. "Opzioni reali e Investimenti in Ricerca e Sviluppo," Quaderni DSEMS 07-2004, Dipartimento di Scienze Economiche, Matematiche e Statistiche, Universita' di Foggia.

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