A synthetic protective put strategy for phased investment in projects without an outright deferral

Sukanto Bhattacharya

Finance from EconWPA

Abstract: In 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.

Keywords: synthetic protective put; replicating portfolio; deferral option (search for similar items in EconPapers)
JEL-codes: G (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec and nep-cfn
Date: 2005-07-04, Revised 2005-07-05
Note: Type of Document - pdf; pages: 18
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpfi:0507005

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