A fuzzy approach to real option valuation

Christer Carlsson, Robert Fullér

Research output: Contribution to journalArticle

173 Citations (Scopus)

Abstract

To have a real option means to have the possibility for a certain period to either choose for or against making an investment 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: 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.

Original languageEnglish
Pages (from-to)297-312
Number of pages16
JournalFuzzy Sets and Systems
Volume139
Issue number2
DOIs
Publication statusPublished - Oct 16 2003

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Keywords

  • Option pricing
  • Possibilistic mean value
  • Possibilistic variance
  • Real options
  • Trapezoidal fuzzy numbers

ASJC Scopus subject areas

  • Logic
  • Artificial Intelligence

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