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Option theory and modeling under uncertainty

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  • Daniel Christiansen
  • Stein Wallace

Abstract

Within the framework of some simple models, we explain how option theory can enhancethe understanding and teaching of modeling under uncertainty. We discuss some commonpitfalls in modeling and argue that these result from a failure to come to grips with optionsand flexibility. We examine a dynamic programming approach to evaluating options and avaluation by arbitrage approach and end by comparing the two approaches with respect tohow they treat time and risk. Copyright Kluwer Academic Publishers 1998

Suggested Citation

  • Daniel Christiansen & Stein Wallace, 1998. "Option theory and modeling under uncertainty," Annals of Operations Research, Springer, vol. 82(0), pages 59-82, August.
    • Handle: RePEc:spr:annopr:v:82:y:1998:i:0:p:59-82:10.1023/a:1018991509947
    DOI: 10.1023/A:1018991509947
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    Cited by:

    1. Sebastian Maier, 2021. "Re-evaluating natural resource investments under uncertainty: An alternative to limited traditional approaches," Annals of Operations Research, Springer, vol. 299(1), pages 907-937, April.
    2. Schütz, Peter & Tomasgard, Asgeir, 2011. "The impact of flexibility on operational supply chain planning," International Journal of Production Economics, Elsevier, vol. 134(2), pages 300-311, December.
    3. Hui, Yer Van & Gao, Jia & Leung, Lawrence & Wallace, Stein, 2014. "Airfreight forwarder’s shipment planning under uncertainty: A two-stage stochastic programming approach," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 66(C), pages 83-102.
    4. Farnaz Farzan & Khashayar Mahani & Kaveh Gharieh & Mohsen Jafari, 2015. "Microgrid investment under uncertainty: a real option approach using closed form contingent analysis," Annals of Operations Research, Springer, vol. 235(1), pages 259-276, December.
    5. Michal Kaut & Kjetil Midthun & Adrian Werner & Asgeir Tomasgard & Lars Hellemo & Marte Fodstad, 2014. "Multi-horizon stochastic programming," Computational Management Science, Springer, vol. 11(1), pages 179-193, January.
    6. Svensson, Elin & Strömberg, Ann-Brith & Patriksson, Michael, 2011. "A model for optimization of process integration investments under uncertainty," Energy, Elsevier, vol. 36(5), pages 2733-2746.
    7. Svensson, Elin & Berntsson, Thore & Strömberg, Ann-Brith, 2009. "Benefits of using an optimization methodology for identifying robust process integration investments under uncertainty--A pulp mill example," Energy Policy, Elsevier, vol. 37(3), pages 813-824, March.
    8. Li, Yemei & Shan, Yanfei & Ling, Shuang, 2022. "Research on option pricing and coordination mechanism of festival food supply chain," Socio-Economic Planning Sciences, Elsevier, vol. 81(C).
    9. Chong Wang & Xu Chen, 2017. "Option pricing and coordination in the fresh produce supply chain with portfolio contracts," Annals of Operations Research, Springer, vol. 248(1), pages 471-491, January.

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