Title: Simulation methods in real option valuation

Authors: Tero Haahtela

Addresses: BIT Research Centre, Aalto University, P.O. Box 15500, FI-00076 AALTO, Finland

Abstract: Simulation is an efficient and versatile method for real option valuation. This paper presents different ways to take advantage of this numerical approach to valuing real investments with managerial flexibility under uncertainty. The methods discussed are classified into three categories: classical methods, simulated pseudo-underlying asset methods and advanced soft computing methods. Each category, with its typical methods and variants, is discussed according to its strengths and shortcomings from the practitioner's point of view, and then a comparison is made between the alternatives according to their usability and technical properties. The purpose is to show both researchers and practitioners the diversity of simulation-based real option valuation methods and what opportunities they provide when chosen to correspond to the valuation cases.

Keywords: real options valuation; ROV; simulation; uncertainty; financial modelling; decision making; managerial flexibility.

DOI: 10.1504/IJOR.2016.075294

International Journal of Operational Research, 2016 Vol.25 No.4, pp.487 - 517

Published online: 10 Mar 2016 *

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