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Valuation of R&D Sequential Exchange Options using Monte Carlo approach

Flavia Cortelezzi and Giovanni Villani ()

Quaderni DSEMS from Dipartimento di Scienze Economiche, Matematiche e Statistiche, Universita' di Foggia

Abstract: This article describes a methodology for evaluating R&D investment projects using Monte Carlomethods. R&D projects generally involves multiple phases with or without overlapping. R&D investments are made often in a phased manner, with the commencement of subsequent phase being dependent on the successful completion of the preceding phase, it is known as sequential investment. Moreover, each stage creates an opportunity (option) for subsequent investment. Therefore, R&D projects can be considered as ‘Compound Options' in which investments present uncertainty both in the gross project value and in costs. It is possible to use exchange options to value the R&D investment opportunities. In this paper, we propose to value the European and American Real Compound Exchange options through Monte Carlo simulation. We also provide a set of numerical experiments to provide evidence for the accuracy of the proposed methodology.

Keywords: Pseudo Compound American Exchange option; R&D; Monte Carlo Methods. (search for similar items in EconPapers)
Pages: 2 pages
Date: 2008-01
New Economics Papers: this item is included in nep-ino, nep-mic, nep-ore and nep-ppm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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