Munich Personal RePEc Archive

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.

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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.

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