Real Options Research Articles

Debtor (Non-)Participation in Sovereign Debt Relief: A Real Option Approach

Abstract Developing countries have recently proved reluctant to participate in sovereign debt moratoria and debt relief initiatives. This paper argues that debtors’ (non-)participation decisions can be understood through the lens of real options. Eligible countries compare the net benefits of participating in a debt relief initiative now with the value of waiting to potentially execute their participation option later, when they may have more information on benefits and costs. The analysis corroborates the real option framing with anecdotal evidence and through a survival analysis showing that debtor countries with larger expected debt service savings or higher pre-existing risks of debt distress were quicker to apply for the Debt Service Suspension Initiative, which provided temporary debt moratoria during the COVID-19 pandemic. The paper discusses policies that can make participation in debt relief initiatives more attractive to debtor countries.

A Real Options Perspective on Entrepreneurial Orientation and Government Ties

Firms’ strategic orientation toward entrepreneurship exposes them to regulatory uncertainties. Prior research suggests that addressing these uncertainties through corporate political activities (CPA) may require costly trade-offs, such as the loss of strategic flexibility. We argue that some of these trade-offs can be mitigated by the way firms structure their CPA. We extend the insights from real options reasoning (ROR) to offer a framework for how firms may circumvent some of these trade-offs through greater CPA breadth, which allows firms to retain their strategic flexibility while reaping some of the benefits of CPA.

Renewable Energy Investments, Support Schemes and the Dirty Option

ABSTRACTIn a real options framework, we analyze the behavior of a large energy producer who can invest in a portfolio of Renewable Energy Source (RES) and dirty energy source. Competitive fuel prices challenge the investments in RES. Given a budget constraint, the agent allocates the optimal capacities of both energy instalments and selects the optimal investment time. We use the model to compare the effectiveness of classical support schemes such as Feed‐in Tariffs or Green Certificate with respect to forms of taxation of dirty technology such as Carbon Taxes or Carbon Permits. This paper proposes a conceptual framework and qualitative analysis to understand which support system enhances the attractiveness of renewable energy investments.

Supplier Instability and Idiosyncratic Risk in China: A Risk Mitigation Perspective from Real Options

ABSTRACT Although supply chain instability has garnered significant attention from both academic and practical fields, the propagation of instability-induced risk along the supply chain remains unclear. This study complements the extant literature by exploring the association between the instability of a firm’s upstream suppliers and the firm’s idiosyncratic risk. Analyzing firms listed on the Shenzhen Stock Exchange and Shanghai Stock Exchange in China from 2014 to 2019, we find that firms with greater supplier instability exhibit higher idiosyncratic risk. However, this risk contagion is weaker for firms with more real options (i.e. greater investment opportunities and managerial flexibility) and for firms in regions with higher levels of FinTech digitalization. The impact of supplier instability on idiosyncratic risk remains robust after addressing endogeneity concerns. Our results provide a deeper understanding of the sources of firms’ idiosyncratic risk in the context of supply chain instability and identify tools to mitigate this risk.

Developing Methods for Assessing the Impact of Digital Innovations on the Economic Efficiency of Enterprises: Methodology for Measuring ROI of Digital Projects

This study aims to develop methodologies for assessing the return on investment (ROI) of digital projects, crucial for understanding the economic impact of digital innovations on enterprises. Traditional ROI metrics often fail to capture the comprehensive value generated by digital projects. The proposed integrative framework employs advanced analytical methods, including cost-benefit analysis, real options analysis, and predictive analytics, to evaluate both tangible and intangible benefits. It incorporates dynamic risk management and scenario planning to address uncertainties and future challenges. Continuous feedback and iterative improvements ensure the framework's accuracy and relevance, enabling enterprises to optimize economic efficiency and strategic decision-making. This holistic approach offers an understanding of the multifaceted value of digital innovations.

A game-based power system planning approach considering real options and coordination of all types of participants

With the ongoing advancement of global power marketization, the increasing diversity of stakeholders in the power market and their interactions have a significant impact on power system planning and operation. Traditional methods employ game theory to describe the interactions among market participants. However, these approaches fail to include all relevant participant types and overlook the long-term uncertainty value of planning schemes. Therefore, this paper proposes a game theory-based power system planning approach considering real options (RO) and coordination of all types of participants. First, the dynamic gaming interaction among supply-transmission-demand is studied, and the independent system operator is integrated into the game planning framework based on the overall perspective of power market operation. Moreover, the new power supply, grid planning, and operation of distributed generation (DG) are taken as decision variables based on the RO theory, and a game decision model of all participants in the power system planning considering the investment uncertainty is constructed. Finally, the iterative search algorithm is employed to solve the model, and the framework is validated based on the IEEE 30-bus system. The results indicate that through collaborative planning involving various market participants, Generation Companies and Transmission Companies expand their investments to maximize profits, while large power consumers reduce their investment in DG and instead increase their direct power purchases to lower costs. Moreover, these participants are inclined to pursue projects with higher asset value volatility, which further enhances their profit. By integrating RO theory with game theory, the proposed approach establishes a comprehensive planning framework that effectively addresses investment uncertainty. This integration enables market participants to make more optimal decisions, ultimately leading to an enhancement in the long-term economic performance of the power system.

When do people switch queues? An empirical study of discretionary queue switching at a physical examination center

AbstractAutomatic queueing systems have been applied in many practical settings to guide customers through a sequence of service stages and achieve efficient queueing. However, our field observations of queueing from a large‐scale physical examination center, which adopts an automatic assignment system with the option of discretionary switching, reveal a relatively high likelihood of queue‐switching requests. That is, many queuers request overriding the algorithm's sequence and ask for a different one, leading to increased total waiting times. Motivated by these observations, this study investigates the behavioral mechanisms behind driving queuers’ switching decisions. Specifically, we examine the roles of two competing mechanisms as the waiting progresses: the motivation to explore a better opportunity (to reduce waiting time) and the consumption of cognitive resources for self‐control to adhere to the assigned queue. Our empirical results reveal a U‐shaped relationship between the examinees’ tendency to switch and the service progress. This U‐shaped relationship steepens when more (vs. less) queuers are ahead of the focal examinee and when the time is (vs. is not) “on an hour” (e.g., 9:00 and 10:00). This study contributes to the behavioral theory of queueing systems through a novel perspective highlighting the competing mechanisms driving individuals’ algorithm aversion behavior (i.e., queue switching) during the progress of multiple services, providing insights into how to design efficient queueing systems.

Hybrid offshore wind projects. Social desirability vs. incentives to invest

To unlock the full potential of offshore wind requires investment in a more integrated offshore grid infrastructure combining generation and interconnection between countries in so-called hybrid projects. Taking the perspective of a social planner, these projects may result in more efficient allocation of scarce resources. Alas, the distribution of this welfare gain may result in disagreement on what grid design is the most attractive, what markets should be connected and whether and when to invest. To examine these dilemmas, we apply real options theory to investments projects with different grid design and market characteristics. We compare the incentives to invest in a) only the wind farm and b) both the wind farm and the grid infrastructure, assuming the project value of the last alternative can serve as a proxy for social welfare. Solutions are derived using a simulation approach called least squares Monte Carlo method. We find: 1) Non-stationary stochastic prices and/or decreasing costs may make it socially optimal as well as commercially beneficial to postpone even profitable investments. 2) Connecting markets is socially desirable but may reduce the offshore wind investor's project value. 3) Connecting markets with different characteristics is socially desirable but reduce the offshore wind investors' project value.

Exploring the Usefulness of Real Options Theory for Foreign Affiliate Divestments: Real Abandonment Options’ Applications

Scholars propose that future research on real options theory should shift attention away from option buying during the first investment stage and toward option execution after investment. Researchers maintain that it would be interesting to explore the circumstances under which investors decide to withdraw their investments, thereby exercising the option to abandon their investments. The present research seeks to fill the gap in the literature and investigate the applicability of real options theory when an organization enhances sustainability policies while focusing on disciplined capital allocation through exit strategies. With case study data on Natura &Co’s divestment strategy for the Body Shop in November 2023, a real options analysis revealed the method’s practical advantages and disadvantages. This paper investigates real options theory in the context of the divestments of foreign affiliates, providing unique viewpoints and enhancing the theory beyond previous knowledge while also increasing our understanding of the divestiture phenomenon. This study concludes with a review of this paper’s theoretical contributions to real options theory, the managerial and practical/social implications of real options applications in general, and the valuation methods of abandonment options in particular, shedding light on the potential of future research.

Strategic investment in power generation and transmission under a feed-in premium scheme: a game theoretic real options analysis

Strategic investment in power generation and transmission under a feed-in premium scheme: a game theoretic real options analysis

The Resilience of Latin American Regionalism: A Neofunctionalist Perspective

AbstractLatin America has seen both recurrent crises and a surprising resilience of its regional organizations. This article explores how different approaches have attempted to explain this seemingly paradoxical record. Combining insights from European Union (EU) studies and comparative regionalism, we ask whether neofunctionalism as a theoretical approach developed for the study of the EU can travel across the Atlantic and enrich the analysis of Latin American regionalism. Neofunctionalist theorists posited that functional spillover could lead to politicization and subsequent deepening of regional integration. But while spillover has been the engine of European integration, it has never been a real option in Latin America. Past applications of neofunctionalist approaches to Latin American regionalism have therefore above all revealed its limitations. Comparative regionalism approaches fared better in that they identified characteristics that account for the repeated crises of Latin American regional organizations. However, this article suggests that the “second-best” strategies mentioned in neofunctionalist analyses, such as encapsulation, spill-around, or even spillback, can help explain the resilience of regionalism in Latin America. While those strategies posed an obstacle to deeper integration, as shown by classical neofunctionalist studies, we draw on a set of case studies to illustrate that Latin American regionalism survived through expansion (spill-around) rather than deepening (spillover), as well as through encapsulation and, in some cases, even spillback. A new reading of neofunctionalism therefore helps to explain the resilience of Latin American regionalism under adverse conditions.

Implementing Real Options Valuation under Macroeconomic Risk and Normally Distributed Cash Flows

The paper highlights the encountered problems in implementing real options under more realistic assumptions such as business cycle risk and normally distributed cash flows. The problems considered include (i) estimating empirical distribution of cash flows from real option investments; (ii) investment decisions across business cycles, and (iii) calculating the probability of investing with the above stated rich features. To this end, we estimate operating cash flows of US corporate firms using a Markov chain model under both geometric and arithmetic Brownian motions assumptions for cash flows and develop a valuation model of real option with normally distributed cash flows. Associated investment valuation models incorporating these estimates reveal that critical cash flow levels significantly differ across models and regimes.

Investment in CCUS under technical uncertainty considering investor's risk aversion: An exotic compound real-options approach

Carbon capture, utilization, and storage (CCUS) technology is effective and value-adding solution for reducing emissions. However, the development and commercialization of these technologies are challenging due to high investment costs and several uncertainties. This study develops a novel comprehensive real-options-based model to evaluate investment in CCUS projects considering the technical risk and the investor's risk aversion. This study proposed an exotic compound real options model that combines American and barrier options. First, applying the Poison process, the technical risk is explicitly modeled. Secondly, the investor's risk aversion is defined as a barrier level for the barrier option part of the proposed model. Thirdly, the value of the project is evaluated through the exotic compound real option. Finally, we assess the economic viability of the project under multiple scenarios. The results of implementing the model for a real case show that the integrated technical risk assessment and the barrier option appropriately address investors' risk aversion. Furthermore, the comparison indicates that the proposed compound real options model is more effective than the traditional NPV (Net Present Value). Regarding policymaking, the results reveal that setting an appropriate carbon tax that considers the costs of carbon capture would be more beneficial. Further, the model provides investors helpful guidance to make proper investment decisions for CCUS technology projects under uncertainties.

The impact of country level investor protection on economic policy uncertainty and corporate investment link

AbstractWe examine the relationship between economic policy uncertainty (EPU) and corporate investment in a global setting based on the real options theory and the agency theory. Using a sample of 44,610 firms from 28 countries, we find that the negative relationship between EPU and investment is more pronounced in the countries with stronger investor protection. In the countries with stronger investor protection, the negative impact of EPU on firms' capital investment is significantly stronger for the firms with more irreversible investment. Further evidence shows that the reduction of investment is mainly from overinvestment firms in the countries with stronger investor protection. Our evidence suggests country level investor protection can act as effective governance mechanisms that mitigate agency problems when firms are facing uncertainty.

Infliximab in Inflammatory Bowel Disease: Leveraging Physiologically Based Pharmacokinetic Modeling in the Clinical Context.

In this study, a physiologically based pharmacokinetic (PBPK) modeling framework was employed to explore infliximab exposure following intravenous (5 mg/kg) and subcutaneous administration (encompassing the approved 120 mg flat-fixed dose as a switching option) in virtual adult and pediatric patients with inflammatory bowel disease (IBD). The PBPK model and corresponding simulations were conducted using the PK-Sim® software platform. The PBPK simulation indicated that a 120 mg subcutaneous flat-fixed dose might not be optimal for heavier adults with IBD, suggesting the need for infliximab dose escalation. For an older virtual pediatric patient (14 years old), subcutaneous administration of a 120 mg flat-fixed dose appears to be a feasible IBD treatment option. In the final exploration scenario, the model was extended to predict hypothetical subcutaneous infliximab doses in a virtual pediatric population (6-18 years old), stratified into three weight bands (20-30 kg, 30-45 kg, and 45-70 kg), that would yield post-switch trough concentrations of infliximab comparable to those seen in adults with the 120 mg flat-fixed subcutaneous dose. The PBPK-model-informed dose suggestions were 40 mg for the 20-30 kg band, 80 mg for the 30-45 kg band, and 120 mg for the 45-70 kg band. As demonstrated in this paper, the PBPK modeling framework can serve as a versatile tool in clinical pharmacology to investigate various clinical scenarios, such as exploring alternative dosing regimens and routes of administration, ultimately advancing IBD treatment across diverse (sub)populations of clinical interest.

Optimum Seismic Retrofit of Deteriorating RC Bridge Columns Based on Risk, Cost–Benefit, and Real Option Analyses

Optimum Seismic Retrofit of Deteriorating RC Bridge Columns Based on Risk, Cost–Benefit, and Real Option Analyses

Storage capacity plan and transition of heterogeneous energy at regional strategic level: A financial derivative perspective

Energy storage plays a key role in harvesting energy among heterogeneous energy sources. To transform heterogeneous energy and plan storage capacity at the regional strategic level, this study simulates storage capacity settings for heterogeneous energy in a certain region (Jiangsu Province in China) from the perspective of investment portfolio. This study then implements adjustments between the generation side and storage side during operations under a hedging ideology. Lastly, this study uses thermal energy on the generation side as an example to apply the switching real option method in decision-making for transitioning from thermal energy to renewable energy during disposal. The conclusion indicates that, from a financial derivative perspective, planning of heterogeneous energy storage capacity proves to be more efficient than existing regional plans and decision-making for transformation achieves investment triggers with higher energy values. Thus, this study aids the power system in planning energy storage and managing heterogeneous energy more economically and comprehensively at the regional strategic level.

How to implement the 2023 IMO GHG strategy? Insights on the importance of combining policy instruments and on the role of uncertainty

In its 2023 strategy for reducing GHG emissions from ships, the International Maritime Organization aims for the uptake of zero or near-zero GHG emissions technologies, fuels or energy to represent at least 5 %, striving for 10 %, of the energy used by 2030. Measures proposed to reach this target combine two kinds of policy instruments: an emission intensity standard and GHG emissions pricing. Proposals vary in terms of the design of the pricing scheme and the subsequent uncertainty that would affect the price signal. This paper assesses the extent to which emissions pricing effectively complements a more restrictive standard on the intensity of GHG emissions to boost transition to low-carbon vessels. Attention is paid to the role of the volatility of the price signal of GHG emissions and fuels prices. For this purpose, the paper applies a multiple real options model to the decision to renew a ship under various sources of uncertainty. Simulations carried out based on a case study show that the price signal effectively complements the more restrictive standard but that the decarbonization objectives are only achieved with a quite ambitious level of pricing. The role of the volatility of the price signal of GHG emissions appears negligible compared to other sources of volatility.

Prenatal Screening of Chromosomal Anomalies Using Genome-Wide or Target Cell-Free DNA: Preferences and Satisfaction of Pregnant Women.

Background/Objectives: Cell-free DNA (cfDNA) is a non-invasive prenatal test used to screen for common trisomies (target cfDNA) that can be expanded to assess all autosomal chromosomes (genome-wide cfDNA). As cfDNA testing gains popularity, it is crucial to examine the factors influencing the decision-making process of pregnant individuals when choosing between these two approaches. Methods: In this prospective cohort study, 190 individuals undergoing cfDNA testing for aneuploidy screening, according to the current screening protocol, were allowed to make their own choice between target and genome-wide cfDNA testing. They were asked to complete a first survey at 11-13 weeks, designed to explore their characteristics, preferences, and satisfaction with the prenatal genetic counseling session, as well as a Decisional Conflict Scale. A postnatal survey was administered three months after delivery, including the Decisional Regret Scale and two open questions. Results: 84% of participants opted for genome-wide cfDNA. However, 17% found the decision challenging, and 14% felt that the results might increase anxiety. No significant differences in participant characteristics were found when comparing decisions between genome-wide and target cfDNA. However, significant differences were observed regarding ethnicity (p = <0.001), educational level (p = 0.029), previous cfDNA experience (p = 0.004), and having sufficient information when comparing termination options (p = 0.002). After delivery, only 4% would have changed their decision. Conclusions: Individuals, regardless of their characteristics, prefer genome-wide cfDNA; however, the complexity of the results necessitates enhanced genetic education for prenatal care clinicians.

Using Real Options and Geometric Brownian Motion Methods to Evaluate Petroleum Projects in Indonesia

There are several methods for evaluating the value of a project. The most commonly used method is the Discounted Cash Flows (DCF) method which is more practical in its use. However, the DCF method still has several weaknesses, including not paying attention to the flexibility of the manager's decision-making when the project is carried out. The Real Options method enhances this by offering more flexible and varied models. This study uses Benninga's version of the binomial method to evaluate the value of petroleum projects with the characteristics of existing companies in Indonesia. In this study, oil prices are assumed to move following the Geometric Brownian Motion (GBM) model which is commonly used in modeling the movement of a fluctuating price. In addition, the author also modifies the binomial model by including expansion options, divestment options and a combination of both. The results of this study show that the more options that managers can choose in decision-making, the greater the opportunity for the company to optimize profits and minimize losses.