A path-dependent contingent-claims approach to capacity investments

Tarik Driouchi, David Bennett and Gary Simpson

European Journal of Operational Research, 2010, vol. 201, issue 1, 319-323

Abstract: This note presents a contingent-claims approach to strategic capacity planning. We develop models for capacity choice and expansion decisions in a single firm environment where investment is irreversible and demand is uncertain. These models illustrate specifically the relevance of path-dependent options analysis to planning capacity investments when the firm adopts demand tracking or average capacity strategies. It is argued that Asian/average type real options can explain hysteresis phenomena in addition to providing superior control of assets in place.

Keywords: Capacity; decisions; Real; options; Path-dependent; contingent-claims (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:201:y:2010:i:1:p:319-323

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