Compound Real Option Valuation with Phase-Specific Volatility: a Multi-phase Mobile Payments Case Study

Cassimon, Danny and Engelen, Peter-Jan and Yordanov, Vilimir (2011): Compound Real Option Valuation with Phase-Specific Volatility: a Multi-phase Mobile Payments Case Study. Published in: Technovation No. 31 (2011): pp. 240-255.

Abstract

Multi-staged R&D projects are copy-book cases of compound real options. Traditional compound option models assume a constant volatility over the lifetime of the project. Building on the n-fold compound option model of Cassimon et al. (2004), we extend this model to allow for phase-specific volatility estimates, while preserving the closed-form solution of the model. We illustrate the extended model with a case study of a real option valuation of a multi-stage software application project by a large mobile phone operator and we show how project managers can estimate phase-specific volatilities.

• Item Type: MPRA Paper
• Language: English
• Keywords: R&D, real options, compound option model, phase-specific volatility
• Subjects: G - Financial Economics > G3 - Corporate Finance and Governance > G31 - Capital Budgeting ; Fixed Investment and Inventory Studies ; Capacity; L - Industrial Organization > L8 - Industry Studies: Services > L86 - Information and Internet Services ; Computer Software; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M1 - Business Administration > M15 - IT Management; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M2 - Business Economics > M21 - Business Economics; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O31 - Innovation and Invention: Processes and Incentives; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O32 - Management of Technological Innovation and R&D

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