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A Fuzzy Approach to Real Option Valuation

Christer Carlsson, Robert Fullér, A Fuzzy Approach to Real Option Valuation. Fuzzy Sets and Systems 139, 297–312, 2003.

Abstract:

To have a {\em real option} means to have the possibility
for a certain period to either choose
for or against making an invetsment decision, without binding
oneself up front. The real option rule is
that one should invest today only if the net present
value is high enough to compensate for giving up
the value of the option to wait. Because the option
to invest loses its value when the investment is
irreversibly made, this loss is an opportunity cost
of investing.
The main question that a management group
must answer for a deferrable
investment opportunity is: {\em How long do we postpone
the investment, if we can postpone it,
up to $T$ time periods?}
In this paper we shall introduce a (heuristic)
real option rule in a fuzzy
setting, where the present values of
expected cash flows and expected costs are estimated
by trapezoidal fuzzy numbers. We shall determine the
optimal exercise time by the help of possibilistic mean
value and variance of fuzzy numbers.

BibTeX entry:

@ARTICLE{jCaFu03a,
  title = {A Fuzzy Approach to Real Option Valuation},
  author = {Carlsson, Christer and Fullér, Robert},
  journal = {Fuzzy Sets and Systems},
  volume = {139},
  pages = {297–312},
  year = {2003},
}

Belongs to TUCS Research Unit(s): Other

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