Article
Economics
Kebin Deng, Jiaxin Peng, Juan Peng, Yuhua Zhang
Summary: This study incorporates the belief of overextrapolation into the classic real options model and provides semi-closed-form solutions for optimal investment and valuation of real options. The theoretical results demonstrate that overextrapolation significantly affects investment and pricing, with the agent underinvesting and undervaluing the option with low belief and overinvesting and overvaluing the option with high belief. Additionally, the model predicts that welfare loss due to distorted investment caused by overextrapolation is insignificant.
ECONOMIC MODELLING
(2022)
Article
Green & Sustainable Science & Technology
Amalia Rodrigo-Gonzalez, Alfredo Grau-Grau, Inmaculada Bel-Oms
Summary: This paper proposes an integrated methodological proposal that combines the circular economy concept and financial valuation through real options analysis. It provides a representation of the course followed by the value of an asset, quantifies value creation from firms' asset circularity under uncertainty, and values the 4R phases as real options using no-arbitrage opportunity arguments.
Article
Green & Sustainable Science & Technology
Bruno Mombello, Fernando Olsina, Rolando Pringles
Summary: Meeting electricity demand with renewable generation requires significant investments exposed to financial risk. This paper proposes a framework for valuing multistage decisions in a grid-scale PV power plant, incorporating compound options to defer, expand, and relocate. The results show that the value of the compound option portfolio exceeds the commonly considered single deferral option, and ignoring expansion and relocation options may lead to underinvestment. These findings have implications for improving allocation efficiency of renewable investments and benefiting stakeholders.
Article
Economics
Jostein Tvedt
Summary: This article examines the impact of real options to relocate on the profitability of the floating offshore wind industry and the mitigation of cost disadvantage compared to fixed-bottom offshore wind. Optimal relocation strategies and real options values are derived under uncertainty, taking into account risk factors such as electricity prices, capacity factors, political uncertainty, collateral valuation, environmental issues, and technological progress.
Article
Environmental Studies
Gualter Couto, Dulce Martins, Pedro Pimentel, Rui Alexandre Castanho
Summary: This study evaluates unexploited urban land in Portugal for new apartment construction using real options analysis, demonstrating the sensitivity of deferral options to changes in the time horizon. The study concludes that deferring construction can add significant value to undeveloped land in the Portuguese market.
Article
Thermodynamics
Bo Sun, Boyang Fan, Yifan Zhang, Jingdong Xie
Summary: Energy storage technology investment in China is hindered by policy and other uncertainties. This study proposes an investment decision model and solves the investment threshold and opportunity value using differential equations. The findings suggest that policy adjustment frequency and subsidy reduction intensity impact energy storage technology investment, with the latter having a greater influence. Technological innovation can mitigate the adverse effects of policy uncertainty. A minimum subsidy of 0.0246 USD/kWh is required for effective investment under relatively certain policies, while a subsidy of 0.0311 USD/kWh is necessary when uncertainties exist.
Article
Mathematics, Interdisciplinary Applications
Songsong Li, Yinglong Zhang, Xuefeng Wang
Summary: Although the academic literature on real options has greatly expanded in the past three decades, an accurate real option pricing model has not yet been developed for investment decision analyses. This paper proposes a real option pricing model based on sunk cost characteristics to estimate the value of real options more accurately. The study reveals that the key distinction between real options and financial options lies in sunk costs, leading to different exercise conditions. Additionally, the paper discusses the intrinsic value function properties and pricing model of real options, highlighting the overestimation issue when applying the Black-Scholes option pricing model.
Article
Business
Mariano Mendez-Suarez, Natividad Crespo-Tejero
Summary: This article explores why banks keep unprofitable customers by applying real options theory to assess their customer lifetime value and identifying threshold values for economically abandoning those customers. The study shows that banks follow real options theory in decision-making, identify optimal divesting points, and isolate the incremental value of reputation.
JOURNAL OF BUSINESS RESEARCH
(2021)
Article
Economics
Ye He, Weiping Hu, Kunwang Li, Xiao Zhang
Summary: This study finds that Chinese firms do not invest aggressively even if there are high investment opportunities. To investigate this, the researchers develop a dynamic model that includes a sentiment channel and find that when managers are less confident about their business prospects, they make investment decisions based on worst-case beliefs, which prevent them from responding sensitively to high investment opportunities, especially in times of high uncertainty. The results also show that uncertainty has a more pronounced impact during the 2008 Global Financial Crisis, further highlighting the role of sentiment in firm investment decisions.
ECONOMIC MODELLING
(2022)
Article
Engineering, Electrical & Electronic
Xiaohe Yan, Chenghong Gu, Hongcai Zhang, Nian Liu, Furong Li, Yonghua Song
Summary: Existing capacity-based network pricing calculates network costs using discounted cash flows, but fails to account for uncertainties and flexibilities of network users. This paper proposes Incremental Cost Network Pricing based on Real Options (ICOC) as a new pricing method that incorporates real options theory to reflect network user uncertainties on network investment. The ICOC scheme allows network operators to delay investment and pay waiting costs based on options' value, thereby avoiding irreversible investment due to uncertainties. The cost is allocated to network users based on their nodal incremental costs. The proposed method is demonstrated on a practical network with different user types (uncertain, flexible, certain and nonflexible), and shows the ability to set cost-reflective price signals based on network user behavior.
IEEE TRANSACTIONS ON POWER SYSTEMS
(2023)
Article
Thermodynamics
Charles Gyamfi Ofori, Godfred Alufar Bokpin, Anthony Q. Q. Aboagye, Anthony Afful-Dadzie
Summary: This study assesses the value of investment delay in renewable energy projects using real options analysis, showing that delaying investments until uncertainties are reduced and maximum benefit is obtained is valuable. High system capacities and favorable renewable energy policies are required to attract private investment in utility-scale renewable energy.
Article
Construction & Building Technology
Kui Xu, Yunchao Zhuang, Xingyu Yan, Lingling Bin, Ruozhu Shen
Summary: As urban flooding becomes more frequent and severe due to climate change and accelerated urbanization, effective urban flood control measures are needed to mitigate urban flooding under environmental change. However, few studies consider both climate change and land use change and formulate urban flood control plans for the uncertainty of climate change. This study proposes a real options method based on trinomial tree model to design urban flood control measures under environmental changes.
SUSTAINABLE CITIES AND SOCIETY
(2023)
Article
Energy & Fuels
Yiju Ma, Archie C. Chapman, Gregor Verbic
Summary: This research proposes a novel financial framework using real options valuation to solve the optimal investment problem for subsidizing residential battery installations. By incorporating Monte Carlo analysis and battery scheduling profiles, this framework can consider uncertainties in PV generation and load behavior, and find the optimal investment plan.
Article
Environmental Studies
Francisco Alcon, Maria Dolores de-Miguel, Jose Miguel Martinez-Paz
Summary: This paper aims to design an assessment procedure for implementing agricultural measures to mitigate diffuse pollution, by comparing the effectiveness and cost of different measures. The case study used the degradation of the Mar Menor lagoon in southeastern Spain and the proposed agricultural measures as an example. The results show that specific actions are needed to reduce the gap between real and perceived cost-effectiveness for successful adoption of good agricultural practices.
Article
Forestry
Rafaele Almeida Munis, Diego Aparecido Camargo, Richardson Barbosa Gomes da Silva, Miriam Harumi Tsunemi, Siti Nur Iqmal Ibrahim, Danilo Simoes
Summary: This study analyzed investment projects in planted forests using empirical data and verified the feasibility of Eucalyptus wood price modeling by introducing fractional Brownian motion and geometric Brownian motion models. The findings showed that Eucalyptus planted forests with three rotation cycles are economically viable.