Switch option: managing strategic investment in an uncertain world

Federica Cucchiella and Massimo Gastaldi

International Journal of Enterprise Network Management, 2008, vol. 2, issue 2, 167-184

Abstract: It is widely accepted in literature that an increase in uncertainty should have an inhibiting effect on investment results. This paper shows that the concept of a negative 'uncertainty–investment' relationship is not always correct. In fact, the uncertainty can actually have a positive impact on investment by means of the real options approach. In this context, this paper deals with a theory useful to increase the performance of a Supply Chain (SC) operating in today's business environment full of uncertainty. Focusing the attention on a specific network two factors are assumed as the main sources of uncertainty: demand and technology change. A switch option is used to develop a new framework to quantify and maximise the expected Net Present Value (NPV). A numerical example and a sensitivity analysis of the option value are finally presented.

Keywords: supply chain management; SCM; flexibility; risk; real options; strategic investment; investment management; uncertainty; supply chain performance; demand; technological change; net present value; NPV. (search for similar items in EconPapers)
Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:ids:ijenma:v:2:y:2008:i:2:p:167-184

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