Title: A review of real options approaches: applying models to value a medical device project

Authors: Kelsey Barton; Yuri Lawryshyn

Addresses: Royal Bank of Canada, New York, NY, USA ' Centre for the Management of Technology and Entrepreneurship, University of Toronto, Toronto, ON, Canada

Abstract: A number of practical real options approaches in literature, some of which have been embraced by industry, lack financial rigour, while many theoretical approaches are not practically implementable. Industry surveys reveal that managers are reluctant to apply some of the more theoretical real options approaches due to their lack of transparency, their complexity, and because of the lack of firm acceptance and top management support. In this paper we compare and contrast five real options approaches designed for managers and apply each to value a medical device product development project. The medical device project is modelled as a compound call option, and the results are contrasted to a traditional NPV calculation. Issues of volatility estimation and the possibility of arbitrage opportunities in the pricing procedures are examined.

Keywords: real options; sequential compound options; managerial information; medical devices; volatility estimation; product development; modelling; compound call options; arbitrage opportunities; pricing procedures; project valuation.

DOI: 10.1504/IJBIR.2016.077612

International Journal of Business Innovation and Research, 2016 Vol.11 No.1, pp.110 - 132

Received: 08 May 2021
Accepted: 12 May 2021

Published online: 07 Jul 2016 *

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