The optimal-exercise policy of an American option dictates when the option should be exercised. In this paper, we consider the implications of missing the optimal exercise time of an American option. For the put option, this means holding the option until it is deeper in-the-money when the...

Many of the different numerical techniques in the partial differential equations framework for solving option pricing problems have employed only standard second-order discretization schemes. A higher-order discretization has the advantage of producing low size matrix systems for computing...

Engineering and operations management decisions have become increasingly complex as a result of recent advances in information technology. The increased ability to access and communicate information has resulted in expanded system domains consisting of multiple agents, each exhibiting autonomous...

In this paper, we use stochastic dynamic programming to model the choice of a municipality which has to design an optimal waste management program under uncertainty about the price of recyclables in the secondary market. The municipality can, by undertaking an irreversible investment, adopt a...

A monopolist typically defers entry into an industry as both price uncertainty and the level of risk aversion increase. By contrast, the presence of a rival typically hastens entry under risk neutrality. Here, we examine these two opposing effects in a duopoly setting. We demonstrate that the...

We treat real option value when the underlying process is arithmetic Brownian motion (ABM). In contrast to the more common assumption of geometric Brownian motion (GBM) and multiplicative diffusion, with ABM the underlying project value is expressed as an additive process. Its variance remains...

While there is practitioner interest in real options (RO), there are significant difficulties in practitioner use of complicated RO models, such as compound options pricing models (OPMs) of multistage investments. Drawing upon theories of learning and knowledge, we propose a general framework...

One of the key parameters in modeling capital budgeting decisions for investments with embedded options is the project volatility. Most often, however, there is no market or historical data available to provide an accurate estimate for this parameter. A common approach to estimating the project...

Deregulated infrastructure industries exhibit stiff competition for market share. Firms may be able to limit the effects of competition by launching new projects in stages. Using a two-stage real options model, we explore the value of such flexibility. We first demonstrate that the value of...

This paper presents a valuation approach for merger and acquisition (M&A) deals employing contingent earnouts. It is argued that these transactions have option-like features, and the paper uses a game-theoretic option approach to model the value of such claims. More specifically, the paper...