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Conclusions and Extensions

In: A Stochastic Control Framework for Real Options in Strategic Evaluation

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  • Alexander Vollert

    (Universität Karlsruhe (TH))

Abstract

The main purpose of the last chapter was to show how generalized timing and switching options can be used to model real option interactions. We compared four different investment strategies in production facilities of a product whose overall demand is governed by a stochastic product life cycle. Starting from the contingency structure of option interactions, each of the four models was expressed in terms of quasi-variational inequalities. All four models were subsequently implemented numerically using finite difference methods. It was shown how generalized timing and, especially, generalized switching options can be transformed into numerical valuation schemes. Although timing options are often dealt with in the real option literature, solving generalized switching options numerically is a new result on its own. This is because impulse control problems which are behind generalized switching options have not so far been solved numerically using approximations of the quasi-variational inequalities.

Suggested Citation

  • Alexander Vollert, 2003. "Conclusions and Extensions," Springer Books, in: A Stochastic Control Framework for Real Options in Strategic Evaluation, chapter 7, pages 241-244, Springer.
    • Handle: RePEc:spr:sprchp:978-1-4612-2068-8_7
    DOI: 10.1007/978-1-4612-2068-8_7
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