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A modified finite-lived American exchange option methodology applied to real options valuation

Title
A modified finite-lived American exchange option methodology applied to real options valuation
Type
Article in International Scientific Journal
Year
2007
Authors
Manuel R Armada
(Author)
Other
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Lawrence Kryzanowski
(Author)
Other
The person does not belong to the institution. The person does not belong to the institution. The person does not belong to the institution. Without AUTHENTICUS Without ORCID
Journal
Vol. 17 No. 3
Pages: 419-438
ISSN: 1044-0283
Publisher: Elsevier
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Scientific classification
FOS: Social sciences > Economics and Business
Other information
Authenticus ID: P-007-H06
Abstract (EN): Investment opportunities that are deferrable over a finite period of time are finite-lived American exchange options. Although such investment opportunities can be valued using the Carr [Carr, P., 1988, The Valuation of Sequential Exchange Opportunities, Journal of Finance 43:5, 1235-1256.] model, the derivation of this model is not very accurate when correctly formulated. Furthermore, past applications (e.g., [Taudes, A. 1998, Software Growth Options, Journal of Management Information Systems 15: 1, 165-185.]) have implemented the model without correcting for an important typo in the Carr paper. While such investment opportunities are more accurately valued using the Carr [Carr, P. 1995, The Valuation of American Exchange Options with Application to Real Options, in: L.Trigeorgis, ed, Real Options in Capital Investment: Models, Strategies and Applications (Praeger, Westport, Connecticut, London).] model, this model suffers from the problem known as "non-uniform convergence". This paper proposes a modified approach for estimating the Carr [Carr, P., 1988, The Valuation of Sequential Exchange Opportunities, Journal of Finance 43:5, 1235-1256.] model that emits more accurate output values with a minimal addition of mathematical and computational cost. The paper then demonstrates the superiority of this modified model for three real investment opportunities.
Language: English
Type (Professor's evaluation): Scientific
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