The generalized sequential compound options pricing and sensitivity analysis

Lee, Meng Yu; Yeh, Fang-Bo; Chen, An-Pin

doi:10.1016/j.mathsocsci.2007.07.001

Cited by 17 publications

(11 citation statements)

References 22 publications

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“…On the methodological level, this implies that simply adding up the isolated values of the option rights inherent in a single R&D project can result in significant misevaluation (Trigeorgis 1993). Instead, sequential R&D investment projects comprising a series of more than just two payments have to be valued as compound real options, that is, options on options (Cassimon et al 2004;Lee et al 2008;Pennings and Sereno 2011). We focus exclusively on compound call options as they mirror the iterative multistage R&D management decision process (Crama et al 2013;Ghosh and Marvin 2012;Kort et al 2010) and are thus the most appropriate for modeling sequential R&D investments.…”

Section: Applying Binomial Option Pricing Methodology To Sequential Rmentioning

confidence: 99%

Modeling sequential R&D investments: a binomial compound option approach

Hauschild

Reimsbach

2014

Bus Res

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In this paper, we propose a binomial approach to modeling sequential R&D investments. More specifically, we present a compound real options approach, simplifying the existing valuation methodology. Based upon the same set of assumptions as prior models, we show that the number of computational steps for valuing any compound option can be reduced to a single step. We demonstrate the applicability of our approach using the real-world example of valuing a new drug application. Overall, our work provides a heuristic framework for fostering the adoption of binomial compound option valuation techniques in R&D management.

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Section: Applying Binomial Option Pricing Methodology To Sequential Rmentioning

confidence: 99%

Modeling sequential R&D investments: a binomial compound option approach

Hauschild

Reimsbach

2014

Bus Res

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“…The 2-fold compound options are not enough for the block-building financial innovations whereas the multi-fold compound options focus on the sequential compound calls only. This paper extend the SCOs from fold-wise interest rate (Lee et al, 2006) to random interest rate.…”

Section: Introductionmentioning

confidence: 92%

The Sequential Compound Option Pricing with Random Interest Rate and Application to Project Valuation

Lee¹,

Yeh²,

Chen³

2006

Proceedings of the 9th Joint International Conference on Information Sciences (JCIS-06)

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This paper proposes the pricing formula of sequential compound options (SCOs) with random interest rate and the applications call Milestone Project Valuation (MPV). Most compound options in literatures are 2-fold with constant parameters through time. The multi-fold compound options are just sequential compound CALL options. The multi-fold sequential compound options proposed in this study are compound option on (compound) option with random interest rate and allow call/put alteration. Besides, the parameters can vary in different folds and make the model more flexible. The SCOs can enhance and broaden the usages of compound option in real option and financial derivative fields, including MPV. The projects that set some critical milestones, which should be achieved sequentially, are called milestone projects. This study propose the milestone project valuation by SCOs with random interest rate.

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“…Formulae for call and put compound options on European option underlying assets were developed by Geske (1979). Extensions include the work of Carr (1988) on the valuation of sequential exchange opportunities; the work of Buchen (2004) on the replication of dual expiry exotics in terms of standardized instruments; the work of Konstandatos (2003Konstandatos ( ,2008 which gives formulae and methodology to price more generalized compound options with both barrier and lookback option underlying assets and features; the work of Lee et al (2008) on generalised sequential compound options, and the work of Kyng (2011) on the application of exotic option pricing theory to the valuation of compound and barrier real options. The type of compound options we consider are more complex than the standard compound options, which may involve options to buy or sell a combination of a call (or put) option and a forward contract.…”

Section: Compound and Barrier Option Featuresmentioning

confidence: 99%

Real Options Analysis for Commodity Based Mining Enterprises with Compound and Barrier Features

Konstandatos

Kyng²

2012

AFR

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Traditional project evaluations rely mainly on Net Present Value methodology, and largely ignore the flexibilities available to the sponsor to vary the project after initiation. Real Options Analysis remedies this by applying option pricing theory to more fully evaluate investment decisions. Through several hypothetical gold-mining examples, we illustrate the economic valuation of multi-stage investment decisions as simple or compound options, possibly with barrier option features. We present analytic valuation formulae for the types of compound options arising in this context, which differ from standard compound options. Barrier options are common in foreign exchange markets, and also arise in our analysis. We also present formulae for the valuation of the compound options appearing in our analysis with barrier features. It turns out that the decision to delay commencement contingent on commodity prices rising requires an up-and-in barrier option feature, whereas the risk of project nationalization may be modeled by adding an up-and-out barrier feature. Other barrier option features also arise in a Real Options context. We apply recently developed valuation methods for compound and barrier exotic options to several gold-mining examples, and we implement examples of the closed form valuation formulae using Excel spreadsheet software.

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The generalized sequential compound options pricing and sensitivity analysis

Cited by 17 publications

References 22 publications

Modeling sequential R&D investments: a binomial compound option approach

Modeling sequential R&D investments: a binomial compound option approach

The Sequential Compound Option Pricing with Random Interest Rate and Application to Project Valuation

Real Options Analysis for Commodity Based Mining Enterprises with Compound and Barrier Features

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