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 ‘Compound 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 InfoPaper provided by Dipartimento di Scienze Economiche, Matematiche e Statistiche, Universita' di Foggia in its series Quaderni DSEMS with number 04-2008.
Length: 2 pages
Date of creation: Jan 2008
Date of revision:
Pseudo Compound American Exchange option; R&D; Monte Carlo Methods.;
Other versions of this item:
- Flavia Cortelezzi & Giovanni Villani, 2009. "Valuation of R&D Sequential Exchange Options Using Monte Carlo Approach," Computational Economics, Society for Computational Economics, vol. 33(3), pages 209-236, April.
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-10-13 (All new papers)
- NEP-INO-2008-10-13 (Innovation)
- NEP-MIC-2008-10-13 (Microeconomics)
- NEP-ORE-2008-10-13 (Operations Research)
- NEP-PPM-2008-10-13 (Project, Program & Portfolio Management)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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- Carr, Peter P, 1988. " The Valuation of Sequential Exchange Opportunities," Journal of Finance, American Finance Association, vol. 43(5), pages 1235-56, December.
- 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.
- Giovanni Villani, 2009. "A Strategic R&D Investment with Flexible Development Time in Real Option Game Analysis," CESifo Working Paper Series 2728, CESifo Group Munich.
- Giovanni Villani, 2014. "Valuation of R&D Investment Opportunities with the Threat of Competitors Entry in Real Option Analysis," Computational Economics, Society for Computational Economics, vol. 43(3), pages 331-355, March.
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