148 research outputs found
An Improved Binomial Lattice Method for Multi-Dimensional Options
No full textWe propose a binomial lattice approach for valuing options whose payoff depends on multiple state variables following correlated geometric Brownian processes. The proposed approach relies on two simple ideas: a log-transformation of the underlying processes, which is step by step consistent with the continuous--time diffusions, as proposed by Trigeorgis (1991), and a change of basis of the asset span, to transform asset prices into uncorrelated processes. We apply an additional transformation to approximate drift-less dynamics. Even if these features are simple and straightforward to implement, we show that they significantly improve the efficiency of the multi-dimensional binomial algorithm. We provide a thorough test of efficiency compared to most popular binomial and trinomial lattice approaches for multi--dimensional diffusions. Although the order of convergence is the same for all lattice approaches, the proposed method shows improved efficiency
A Log-Transformed Binomial Lattice Approach for Valuing Multi-Assets Options
No full textWe propose a binomial lattice approach for valuing options whose payoff depends on multiple state variables following correlated geometric Brownian processes. The proposed approach relies on two main ideas: a transformation of the underlying processes as in the log-transformed binomial lattice approach by Trigeorgis (1991), and a change of basis of the asset span, to transform them into uncorrelated processes. These features improve the efficiency of the multi-dimensional binomial algorithm. We provide a thorough test of efficiency compared to most popular lattice approaches for multi-dimensional diffusions. Although the order of convergence is the same as in the other approaches the proposed approach shows improved efficienc
Valuing Human Capital Career Development: A Real Options Approach
No full textPurpose – There has been a long controversy in the literature on assessing the value of human capital – a longsought but elusive and challenging task. The ability to quantify flexible human capital (FHC) has been a shortcoming in extant literature. We make a meaningful contribution by showing how real options (RO) methodology can be used to quantify FHC and we provide complementary case study evidence from Fortune 500 “best companies to work for” that the value of employee career development is higher in more volatile sectors in line with real options theory (ROT).
Design/methodology/approach – This article provides a prescriptive RO methodology for adopting a more flexible, staged SHRM organizational perspective suitable for uncertain environments, and explores its theoretical and empirical implications through the dual use of RO methodological modelling and multi-case study data involving ten Fortune 500 companies. The case study approach is aimed at creating managerially relevant knowledge. The relevance of our approach to managerial practice is shown through guidelines on how a company like Google might use the RO methodology to estimate the career development option value so as to inform its internal development program for employees to create and capture value.
Findings – Our focus is on the staging flexibility in HR as exemplified by the internal career development process. This process can be viewed as a multi-stage (compound) option involving various types of HC uncertainty, HC options, and HR practices. We model staging HR deployment via the option to promote staff employees to middle level management, itself embedding the option to rise to the top management. To empirically validate our valuation approach, we present case study research that enables quantifying the option value of a career development program and allows assessing how much a mismatch exists in a sample of ten public U.S. companies.
Research limitations/implications – The overall staging quantification idea is important as it offers guidance as to how to value HR as a sequential investment process under uncertain demand or skill conditions. The analysis is limited to the extent that staged career development might interact with other types of human capital (e.g. switch and learning) options and HR practices (e.g. training). Human resources may also interact with other organizational intangibles, such as brand equity. Our analysis also does not account for
psychological considerations from the employees’ perspective, such organizational commitment facilitating trust to enable reciprocal commitments, which remains a fruitful subject for future extensions.
Practical implications – ROT can provide useful guidance and tools for HR scholars and managers. By keeping tabs on HR-based flexibility value and focusing on the key input variables driving HR flexibility, HR managers can determine the flexibility value unleashed from staging the deployment of HC resources in the face of unanticipated demand and skills shifts.
Originality/value – This is the first paper that attempts to quantify the value of staged career development flexibility using the RO methodology. This article will be cited for its innovativeness in being the first to quantify the value of human capital’s contribution to corporate value creation and provide objective evaluation in the context of organizational career-development programs. Besides providing useful insights to scholars, the article also demonstrates how the RO methodology can apply to actual companies and inform managerial
practice offering guidelines of relevance to HR practitioners on how to quantify the value of staged HC development in an uncertain environment
Investment under uncertainty and policy change
No full textIn this paper the impact of a policy change on the investment behavior of the firm is studied in an incomplete information setting. The policy change occurs when a stochastic process describing the state of the economic environment reaches a certain trigger. The firm has incomplete information about the trigger and knows only its probability distribution. Consequently, both the firm's conjecture concerning the trigger value as well as the precision of this conjecture serve as input parameters. We derive the optimal investment rule maximizing the value of the firm and show that the impact of the trigger value uncertainty on the optimal investment threshold is non-monotonic: the threshold decreases with uncertainty for its low levels, while the reverse is true if uncertainty is high. Furthermore, we provide results concerning the valuation of the firm's investment opportunity and present some policy implications
Strategic Investment: Real Options and Games
No full textCorporate finance and corporate strategy have long been seen as different sides of the same coin. Though both focus on the same broad problem, investment decision-making, the gap between the two sides--and between theory and practice--remains embarrassingly large. This book synthesizes cutting-edge developments in corporate finance and related fields--in particular, real options and game theory--to help bridge this gap. In clear, straightforward exposition and through numerous examples and applications from various industries, Han Smit and Lenos Trigeorgis set forth an extended valuation framework for competitive strategies.
The book follows a problem-solving approach that synthesizes ideas from game theory, real options, and strategy. Thinking in terms of options-games can help managers address questions such as: When is it best to invest early to preempt competitive entry, and when to wait? Should a firm compete in R&D or adopt an accommodating stance? How does one value growth options or infrastructure investments? The authors provide a wide range of valuation examples, such as acquisition strategies, R&D investment in high-tech sectors, joint research ventures, product introductions in consumer electronics, infrastructure, and oil exploration investment.
Representing a major step beyond standard real options or strategy analysis, and extending the power of real options and strategic thinking in a rigorous fashion, Strategic Investment will be an indispensable guide and resource for corporate managers, MBA students, and academics alike
Compete, Cooperate, or Both? Integrating the Demand Side into Patent Deployment Strategies for the Commercialization and Licensing of Technology
No full textProfiting from innovation typically involves a choice between commercializing a patented technology in the product market to exploit proprietary advantage (i.e., competition) or licensing the technology to an incumbent in the market for ideas (a form of cooperation). A firm may thus deploy a patented technology in ways that may differ in their aggressiveness toward, or accommodation of, competitors. We analyze the deployment of patented technology employing either competition or collaboration modes, or both together (i.e., coopetition), as well as switching among them across demand states or over time, or delaying these choices until more information is available. We thus view a patent as a bundle of real options that enables a firm to manage not only the classic tension between commitment and flexibility but also the tension between competition and cooperation. We develop theory and propositions to predict which of these patent deployment modes will be chosen by an innovator facing an established firm as a function of the strength of the technology, market or bargaining power, and other market conditions, particularly the level and volatility of market demand
Invest Today or… Tomorrow? A Real Option Approach to Strategic Development in the French DSL Market
No full textThis paper presents a descriptive case study of the new entrants' strategies on the French DSL market, applying the theoretical framework of real options. It is shown that two main strategies have been built around different analyses of the fixed incumbent operator's wholesale offer. The first is based purely on a classical valuation approach (net present value). The second accounts for an "invest tomorrow" real option included in the incumbent's wholesale offer. The trade-off carried out by new entrants with the second strategy is then analysed and illustrated with a real option valuation based on the binomial tree method. Consequently, wholesale offer prices could include a mark-up to reflect the loss of a real option value by the incumbent in favour of new entrants.Broadband, DSL, French communications market, real options, DSL wholesale offers, pricing.
Valuation of Brand Equity and Retailer Growth Strategies Using Real Options
No full textIn marketing, significant attention has been devoted to the study of drivers and outcomes of strategic flexibility drawing on real options theory. However, research that quantifies the specific value of flexibility reflected in a bundle of strategic real options is lacking. To remedy this gap, we develop a real options-based framework that takes account of brand expansion and extension options to value brand equity and retailer growth strategies. We show how to value the bundle of strategic real options associated with a flexible marketing strategic vision and how to assess the growth strategies related to the corporate brand of an international retailer. We apply our method to estimating the brand equity of Starbucks both under growth and adversity conditions. The results reveal that our method can more reliably incorporate the growth potential of the brand under uncertainty conditions. Comparisons with other brand valuation approaches are discussed. Our study helps clarify the links among management’s strategic plans, brand-based marketing strategies and share price, and allows to better monitor the impact of retailer strategic choices on long-term brand equity value
The Nature of Option Interactions and the Valuation of Investments with Multiple Real Options
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