A Compound Option Model of Production and Intermediate Inventories
AbstractThis article extends the option approach to valuing real assets by modeling the firm as a two-stage process with bounded output rates, in which the output of the first stage may be held as work-in-process. In this setting, the real asset becomes a compound option, which, if exercised, gives the option to finish the work-in-process and sell the output as its final payoff. The existence of intermediate inventories may arise as an optimal investment strategy for exploiting possible future price increases. The framework allows us to analyze the effect of uncertainty on output rates and the effect of interest rates changes on inventory levels. Copyright 1993 by University of Chicago Press.
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Bibliographic InfoArticle provided by University of Chicago Press in its journal Journal of Business.
Volume (Year): 66 (1993)
Issue (Month): 4 (October)
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- Lee, Meng-Yu & Yeh, Fang-Bo & Chen, An-Pin, 2008. "The generalized sequential compound options pricing and sensitivity analysis," Mathematical Social Sciences, Elsevier, vol. 55(1), pages 38-54, January.
- Murillas Maza, Arantza, 2000. "Uncertainty and Real Options. Investment and Development of Fishing Resources (II)," BILTOKI 2000-02, Universidad del País Vasco - Departamento de Economía Aplicada III (Econometría y Estadística).
- Murillas Maza, Arantza, 2000. "Uncertainty and Real Options. Investment and Development of Fishing Resources (I)," BILTOKI 2000-01, Universidad del País Vasco - Departamento de Economía Aplicada III (Econometría y Estadística).
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- Yepes Rodriguez, Ramón, 2008. "Real option valuation of free destination in long-term liquefied natural gas supplies," Energy Economics, Elsevier, vol. 30(4), pages 1909-1932, July.
- Steven Ott & W. Hughen & Dustin Read, 2012. "Optimal Phasing and Inventory Decisions for Large-Scale Residential Development Projects," The Journal of Real Estate Finance and Economics, Springer, vol. 45(4), pages 888-918, November.
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