A Compound Option Model of Production and Intermediate Inventories
This 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.
When requesting a correction, please mention this item's handle: RePEc:ucp:jnlbus:v:66:y:1993:i:4:p:517-40. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Journals Division)
If references are entirely missing, you can add them using this form.