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A Real Options and Game-Theoretic Approach to

Author

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  • Han T. J. Smit
  • L. A. Ankum

Abstract

An investment strategy encompasses a sequence of tactical investment projects, of which several may yield a low return when considered in isolation. Some low-return investment projects can actually be seen as the first links in a chain of subsequent investment decisions. The value of these projects does not derive so much from their expected cash inflows but rather from the option to invest in a follow-up project for future commercial exploitation. For example, an R&D project, the development of a new technology, or entry into a new geographical market may create future investment opportunities. In strategy, these projects are often compared with options for future company growth.

Suggested Citation

  • Han T. J. Smit & L. A. Ankum, 1993. "A Real Options and Game-Theoretic Approach to," Financial Management, Financial Management Association, vol. 22(3), Fall.
  • Handle: RePEc:fma:fmanag:smit93
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    Citations

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    Cited by:

    1. Pawlina, G. & Kort, P.M., 2001. "Strategic Capital Budgeting : Asset Replacement Under Uncertainty," Discussion Paper 2001-4, Tilburg University, Center for Economic Research.
    2. Matteo Ferraris & Elena Pagliarino, 2014. "Real Option Theory and Application to the Fishery Industry: A survey of the literature," CERIS Working Paper 201408, Institute for Economic Research on Firms and Growth - Moncalieri (TO) ITALY -NOW- Research Institute on Sustainable Economic Growth - Moncalieri (TO) ITALY.
    3. Murto, Pauli & Nasakkala, Erkka & Keppo, Jussi, 2004. "Timing of investments in oligopoly under uncertainty: A framework for numerical analysis," European Journal of Operational Research, Elsevier, vol. 157(2), pages 486-500, September.
    4. Ko, Chuan-Chuan & Lin, Tyrone T. & Yang, Chyan, 2011. "The venture capital entry model on game options with jump-diffusion process," International Journal of Production Economics, Elsevier, vol. 134(1), pages 87-94, November.
    5. Hommel, Ulrich, 2003. "Financial versus operative hedging of currency risk," Global Finance Journal, Elsevier, vol. 14(1), pages 1-18, May.
    6. Reiss, Ariane, 1998. "Investment in Innovations and Competition: An Option Pricing Approach," The Quarterly Review of Economics and Finance, Elsevier, vol. 38(3, Part 2), pages 635-650.
    7. Li, Yong & Mahoney, Joseph T., 2011. "When are venture capital projects initiated?," Journal of Business Venturing, Elsevier, vol. 26(2), pages 239-254, March.
    8. Li, Yong & James, Barclay & Madhavan, Ravi & Mahoney, Joseph T., 2006. "Real Options: Taking Stock and Looking Ahead," Working Papers 06-0114, University of Illinois at Urbana-Champaign, College of Business.
    9. Gomes Santana Félix, Elisabete, 2003. "Opções reais: tipologias e sua avaliação
      [Real options: typologies and its evaluation]
      ," MPRA Paper 6186, University Library of Munich, Germany.
    10. Chen, Yu-Fu & Funke, Michael, 2008. "China´s new labour contract law: no harm to employment?," SIRE Discussion Papers 2008-51, Scottish Institute for Research in Economics (SIRE).
    11. Smit, Han T.J. & Trigeorgis, Lenos, 2006. "Real options and games: Competition, alliances and other applications of valuation and strategy," Review of Financial Economics, Elsevier, vol. 15(2), pages 95-112.
    12. Carol Alexander & Xi Chen, 2012. "A General Approach to Real Option Valuation with Applications to Real Estate Investments," ICMA Centre Discussion Papers in Finance icma-dp2012-04, Henley Business School, Reading University.
    13. Ulrich Pape & Stephan Schmidt-Tank, 2005. "Valuing Joint Ventures Using Real Options," Finance 0503030, EconWPA.
    14. Grzegorz Pawlina & Peter M. Kort, 2006. "Real Options in an Asymmetric Duopoly: Who Benefits from Your Competitive Disadvantage?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(1), pages 1-35, March.
    15. Martzoukos, Spiros H. & Zacharias, Eleftherios, 2013. "Real option games with R&D and learning spillovers," Omega, Elsevier, vol. 41(2), pages 236-249.
    16. Rosalba Padalino, 2004. "Opzioni reali e Investimenti in Ricerca e Sviluppo," Quaderni DSEMS 07-2004, Dipartimento di Scienze Economiche, Matematiche e Statistiche, Universita' di Foggia.
    17. Boonman, H.J., 2014. "Strategic real options : Capacity optimization and demand structures," Other publications TiSEM 2c1d43fb-e8d5-4f50-9bbf-f, Tilburg University, School of Economics and Management.

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