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A model for determining whether a firm should exercise multiple real options individually or simultaneously

Michi Nishihara ()
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Michi Nishihara: Graduate School of Economics, Osaka University

No 10-12, Discussion Papers in Economics and Business from Osaka University, Graduate School of Economics

Abstract: We develop a model for determining whether a firm should exercise two real options individually or simultaneously. The simultaneous exercise of both options has positive synergy, such as economies of scale, scope, and networks, while separate exercise of each option benefits from project flexibility. This tradeoff determines the optimal exercise policy. We investigate the static and dynamic management of multiple real options. A firm under static management determines the type of exercise of real options ex ante; on the other hand, a firm under dynamic management makes the decision at the time of exercise. The analysis reveals the gap between the two styles of managing. Most importantly, we highlight the advantage of dynamic management over static management, particularly for weakly correlated markets. We also explain empirical implications regarding a firm fs entry into several countries and regions in Asia.

Keywords: multiple real options; optimal stopping; exercise region; entry into Asia (search for similar items in EconPapers)
JEL-codes: C61 G13 G31 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2010-04
New Economics Papers: this item is included in nep-ppm and nep-sea
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