Valuation of R&D Sequential Exchange Options Using Monte Carlo Approach
AbstractThis article describes a methodology for evaluating R&D investment projects using Monte Carlomethods. R&D projects generally involves multiple phases with or without overlapping. R&D investments are made often in a phased manner, with the commencement of subsequent phase being dependent on the successful completion of the preceding phase, it is known as sequential investment. Moreover, each stage creates an opportunity (option) for subsequent investment. Therefore, R&D projects can be considered as âCompound Options' in which investments present uncertainty both in the gross project value and in costs. It is possible to use exchange options to value the R&D investment opportunities. In this paper, we propose to value the European and American Real Compound Exchange options through Monte Carlo simulation. We also provide a set of numerical experiments to provide evidence for the accuracy of the proposed methodology.
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Bibliographic InfoArticle provided by Society for Computational Economics in its journal Computational Economics.
Volume (Year): 33 (2009)
Issue (Month): 3 (April)
Pseudo compound American exchange option; R&D; Monte Carlo methods; G13; O32; C15;
Other versions of this item:
- Flavia Cortelezzi & Giovanni Villani, 2008. "Valuation of R&D Sequential Exchange Options using Monte Carlo approach," Quaderni DSEMS 04-2008, Dipartimento di Scienze Economiche, Matematiche e Statistiche, Universita' di Foggia.
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- O32 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Management of Technological Innovation and R&D
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
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- Cassimon, Danny & Engelen, Peter-Jan & Yordanov, Vilimir, 2011. "Compound Real Option Valuation with Phase-Specific Volatility: a Multi-phase Mobile Payments Case Study," MPRA Paper 46053, University Library of Munich, Germany.
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