Compound Real Option Valuation with Phase-Specific Volatility: a Multi-phase Mobile Payments Case Study

Danny Cassimon, Peter-Jan Engelen and Vilimir Yordanov

MPRA Paper from University Library of Munich, Germany

Abstract: Multi-staged R&D projects are copy-book cases of compound real options. Traditional compound option models assume a constant volatility over the lifetime of the project. Building on the n-fold compound option model of Cassimon et al. (2004), we extend this model to allow for phase-specific volatility estimates, while preserving the closed-form solution of the model. We illustrate the extended model with a case study of a real option valuation of a multi-stage software application project by a large mobile phone operator and we show how project managers can estimate phase-specific volatilities.

Keywords: R&D; real options; compound option model; phase-specific volatility (search for similar items in EconPapers)
JEL-codes: G31 L86 M15 M21 O31 O32 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (22)

Published in Technovation 31 (2011): pp. 240-255

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