Valuation of the minimum revenue guarantee and the option to abandon in BOT infrastructure projects

Yu-Lin Huang and Shih-Pei Chou

Construction Management and Economics, 2006, vol. 24, issue 4, 379-389

Abstract: The real option approach is used to value the minimum revenue guarantee (MRG) and the option to abandon in Build-Operate-Transfer infrastructure projects. The option to abandon is formulated under an investment option held by the concessionaire at contract signing and to expire before construction commencement. MRG is formulated as a series of European style put options in a single option pricing model. When combined with the option to abandon in the pre-construction phase, MRG is reconstructed as a series of European style call options to develop a compound option pricing formula. The Taiwan High-Speed Rail Project is chosen as a numerical case to apply the formulas. The results show both MRG and the option to abandon can create values. When MRG and the option to abandon are combined, they will counteract each other and their values will thus be reduced. Increasing the MRG level will decrease the value of the option to abandon, and, at a certain MRG level, the option to abandon will be rendered worthless.

Keywords: BOT; infrastructure; real option; option to abandon; minimum revenue guarantee (search for similar items in EconPapers)
Date: 2006
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (28)

Downloads: (external link)
http://www.tandfonline.com/doi/abs/10.1080/01446190500434997 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:conmgt:v:24:y:2006:i:4:p:379-389

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RCME20

DOI: 10.1080/01446190500434997

Access Statistics for this article

Construction Management and Economics is currently edited by Will Hughes

More articles in Construction Management and Economics from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().