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A model for determining whether a firm should exercise multiple real options individually or simultaneously

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  • Michi Nishihara

    ()
    (Graduate School of Economics, Osaka University)

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    Abstract

    We develop a model for determining whether a firm should exercise two real options individually or simultaneously. The simultaneous exercise of both options has positive synergy, such as economies of scale, scope, and networks, while separate exercise of each option benefits from project flexibility. This tradeoff determines the optimal exercise policy. We investigate the static and dynamic management of multiple real options. A firm under static management determines the type of exercise of real options ex ante; on the other hand, a firm under dynamic management makes the decision at the time of exercise. The analysis reveals the gap between the two styles of managing. Most importantly, we highlight the advantage of dynamic management over static management, particularly for weakly correlated markets. We also explain empirical implications regarding a firmfs entry into several countries and regions in Asia.

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    File URL: http://www2.econ.osaka-u.ac.jp/library/global/dp/1012.pdf
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    Bibliographic Info

    Paper provided by Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) in its series Discussion Papers in Economics and Business with number 10-12.

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    Length: 27 pages
    Date of creation: Apr 2010
    Date of revision:
    Handle: RePEc:osk:wpaper:1012

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    Web page: http://www.econ.osaka-u.ac.jp/
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    Related research

    Keywords: multiple real options; optimal stopping; exercise region; entry into Asia;

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    1. BOBTCHEFF Catherine & VILLENEUVE Stephane, 2006. "Irreversible Investment in Competitive Projects: A New Motive for Waiting to Invest," LERNA Working Papers 06.20.213, LERNA, University of Toulouse.
    2. Boyle, Phelim P., 1988. "A Lattice Framework for Option Pricing with Two State Variables," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 23(01), pages 1-12, March.
    3. Childs, Paul D. & Ott, Steven H. & Triantis, Alexander J., 1998. "Capital Budgeting for Interrelated Projects: A Real Options Approach," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(03), pages 305-334, September.
    4. Mark Broadie & Jér�me Detemple, 1997. "The Valuation of American Options on Multiple Assets," Mathematical Finance, Wiley Blackwell, vol. 7(3), pages 241-286.
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