A synthetic protective put strategy for phased investment in projects without an outright deferral
AbstractIn this paper we propose and computationally demonstrate a synthetic protective put strategy for real options. Specifically, we deal with the problem of deferral option when an outright deferral is not permissible due to competitive pressures. We demonstrate that in such a situation an appropriate strategy would be to invest in the new project in phases rather than doing it all at once. By setting the owner’s equity in the project equal to the price of a call option on the value of the project, we set up the replicating portfolio for a protective put on the project. Our method is a logical extension of the financial protective put in the real options scenario and is rather simple and practicable for businesses to adopt and apply.
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Bibliographic InfoPaper provided by EconWPA in its series Finance with number 0507005.
Length: 18 pages
Date of creation: 04 Jul 2005
Date of revision: 04 Jul 2005
Note: Type of Document - pdf; pages: 18
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synthetic protective put; replicating portfolio; deferral option;
Find related papers by JEL classification:
- G - Financial Economics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-07-11 (All new papers)
- NEP-BEC-2005-07-11 (Business Economics)
- NEP-CFN-2005-07-11 (Corporate Finance)
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.:
- Robert S. Pindyck, 1992.
"Investments of Uncertain Cost,"
NBER Working Papers
4175, National Bureau of Economic Research, Inc.
- Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
- Bhattacharya, Sudipto, 1978. "Project Valuation with Mean-Reverting Cash Flow Streams," Journal of Finance, American Finance Association, vol. 33(5), pages 1317-31, December.
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