Real Options Valuation: A Case Study of an E‐commerce Company

Rocío Sáenz‐Diez, Ricardo Gimeno and Carlos De Abajo

Journal of Applied Corporate Finance, 2008, vol. 20, issue 2, 129-143

Abstract: This paper presents a real options valuation model with original solutions to some issues that arise frequently when trying to apply these models to real‐life situations. The authors build on existing models by introducing an innovative and intuitive risk neutral adjustment that allows us to work with all the simulated paths. The problem of incorporating real options into each path is solved with a “nearest neighbors” technique, and uncertainty is simulated using a beta distribution that adapts better to company‐specific information. The model is then applied to a real life e‐commerce company to produce the following insights: the expanded present value is higher than the traditional present value; the presence of several real options make them interact so that their values are nonadditive; and part of the expanded present value is explained by the presence of “Jensen's inequality” that stems from the “convexity” between the value of each year's cash flow and the uncertain variables.

Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1111/j.1745-6622.2008.00187.x

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:bla:jacrfn:v:20:y:2008:i:2:p:129-143

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=1078-1196

Access Statistics for this article

Journal of Applied Corporate Finance is currently edited by Donald H. Chew Jr.

More articles in Journal of Applied Corporate Finance from Morgan Stanley
Bibliographic data for series maintained by Wiley Content Delivery ().