Conclusions and Extensions

Alexander Vollert
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Alexander Vollert: Universität Karlsruhe (TH)

Chapter 7 in A Stochastic Control Framework for Real Options in Strategic Evaluation, 2003, pp 241-244 from Springer

Abstract: 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.

Keywords: Cash Flow; Real Option; Product Life Cycle; Geometric Brownian Motion; Option Interaction (search for similar items in EconPapers)
Date: 2003
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-1-4612-2068-8_7

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DOI: 10.1007/978-1-4612-2068-8_7

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