Approximate valuation of real R&D American sequential exchange options

Jongwoo Lee, Dean A. Paxson

Research output: Chapter in Book/Report/Conference proceedingChapter

Abstract

This chapter describes four real exchange and sequential exchange option models. The European and American sequential exchange option values are similar. Some very broad assumptions as to e-commerce values and development costs are made to assess the possible benefits of e-commerce research and development (R&D) and real option values. The multivariate normal assumption presumes that both value and cost return proxies are normally distributed and stationary. Other remaining theoretical problems include using multivariate normal distributions that can model several investment stages over time; volatility, and correlation matrices for these sequential investments; allowing for variable ecommerce income and development cost escalation assumptions over time; and using mixed diffusion-jump processes for both value and cost. Determining the optimal exercise time for R&D and development stage expenditures is an important consideration. These real American sequential exchange option values models do not allow for the abandonment option or for the more realistic R&D and continuous expenditures over time. © 2003 Elsevier Ltd All rights reserved.
Original languageEnglish
Title of host publicationReal R & D Options|Real R & D Options
PublisherElsevier BV
Pages130-148
Number of pages18
DOIs
Publication statusPublished - Dec 2003

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