This paper investigates the effect of uncertainty about input parameters on the accuracy of real option valuation. It compares the error from no-arbitrage valuation with the error from using DCF. Despite the theoretical superiority of no-arbitrage valuation it is shown to be less accurate than...

Most empirical studies on arbitrage opportunities tend to focus on arbitrage resulting from two “securities”, normally option value in relation to its underlying assets. However, in this empirical study it is illustrated that by writing “different” option values the “amount” of...

There is a link between barrier options and tax shields of interest expense. We combine this link with a traditional valuation approach, to present practical valuation formulas for interest tax shields in three debt scenarios with risk of default: (1) constant debt, (2) delayed debt, and (3)...

We study how interactions between financing and investment decisions can shape firm boundaries in dynamic product markets. In particular, we model a new product market opportunity as a growth option and ask whether it is best exploited by a large incumbent firm (Integration) or by a separate,...

Some parallel algorithms are proposed to speed up computation of multivariate lattices used to evaluate rainbow options. These novel algorithms have been programmed using multi-threaded syntax in Gauss of Aptech honing codes for 32 and 128 cores machines. Actual scaling is linear or superlinear...

Pushing models to extremes can expose output biases that stem from underlying assumptions. In the case of industry standard option valuation models, long term, high volatility securities provide a stress test vehicle. For instance, in evaluating a stock with 60% volatility, industry standard...

This paper uses an example involving a commercial real estate project to demonstrate the practical application of real options analysis. The approach described can be used to value the project at any stage of construction, which is especially useful when market conditions are poor and suspension...

In this paper a joint capital asset pricing model and option pricing model is considered and applied to the derivation of an equity's value and its systematic risk. We first analyze the propreties of the two models and present some newly found properties of the option pricing model. We then...

Financial statements and an accompanying NPV calculation are embedded into a binomial tree. This generalization of traditional static NPV analysis allows the financial statements to both evolve through time and, at any given time, to vary with states of the world (similar to a Monte Carlo...

This article integrates an earnings-based capital structure model into a simple real options framework to analyze the effects of managerial optimism and overconfidence on the interaction between financing and investment decisions. Several empirical implications follow from solving the model....