Real Options Research Articles

Offshore carbon storage from power plants based on real option and multi‐period source‐sink matching: A case study in the eastern coastal China

Carbon capture utilization and storage (CCUS) emerges as a pivotal strategy for CO2 reduction in the power sector, particularly focusing on the overlooked domain of offshore storage along China's east coast. In spite of the potential high costs, irreversible investments, and lengthy development, offshore storage can still be prospective. Considering autonomous decision-making among emission sources, this study pioneers a CO2 offshore storage investment decision model tailored for coal-fired and gas-fired power plants. Innovating an offshore storage source-sink matching model with a real options model and introducing a pipeline network optimization model allows a realistic source-sink matching strategy to be explored under optimal investment timing. According to the results, among 154 large stationary emission sources in Zhejiang Province, offshore storage could reduce CO2 emissions by 4.59 Gt, utilizing the Qiantang, Minjiang, and Fuzhou depressions. It is economically feasible to implement offshore storage with a whole-process unit cost of 368.8 CNY/tCO2, mainly dominated by capture costs. A hybrid carbon tax-subsidy policy promotes carbon reduction and economic benefits, offering a more effective incentive for emission sources to invest in offshore storage than a single policy. At a hybrid policy price of 250 CNY/tCO2, all 27 selected emission sources are projected to invest in offshore storage by 2048, with a preference for the Qiantang depression as the storage site. Practically, this study provides important technical support and guidance for the large-scale deployment of offshore storage.

Pricing blue carbon to promote the protection and restoration of the marine environment: A real option model

Pricing blue carbon will allow the monetization of the implicit carbon sequestration value of socioeconomic activities in marine ecosystems. This will empower those engaged in marine environment protection and restoration to reap economic benefits while imposing costs on those who harm the marine environment or carbon-emitting enterprises. This can significantly increase the enthusiasm of local governments, enterprises, and others for protecting and restoring the marine environment. However, owing to the characteristics of public goods and the externalities of blue carbon, it is difficult to price them through the supply and demand relationship of the traditional market. This paper focuses on how to price blue carbon under government policies and market uncertainties to encourage investors to engage in blue carbon projects involving the ecological protection and restoration of coastal wetlands. First, a universal blue carbon pricing model is established via the real option approach. The mangrove blue carbon project in Zhanjiang, Guangdong, was used as a case study to evaluate the price of mangrove blue carbon. This research provides technical support for the formation of blue carbon prices, and this method can be used not only to promote the protection and restoration of the marine environment but also to optimize the supply of blue carbon, fully leveraging its role in addressing climate change.

Fleet vehicle replacement strategy in the Korean market under phase-out of conventional vehicle

With the recent global requirements to phase out internal combustion engine vehicles (ICEVs), fleet owners (FOs) must consider battery electric vehicles (BEVs) as replacements, introducing regulatory risk due to policy changes. Many countries have legal retirement age limit for fleet vehicles (FVs), considered as policy constraint necessitating eventual replacement. Additionally, uncertainties like fuel price of ICEV and battery price affect the replacement decision. This study proposes an optimal replacement strategy using real option approach for annual decision-making under multiple risk factors. Using data from the Korean FV market, we provide managerial implications. Despite optimistic battery price projections, voluntary BEV switching is not expected to exceed 40% of total FVs. Sensitivity analysis reveals that adjusting the legal retirement age is more effective than changing the BGVSP implementation year. Also, A flexible subsidy based on fuel prices and the extension of the legal retirement age limit through safety inspections should be recommended.

Public Policy Impacts on Entrepreneurial Entry and Exit: A Real Options Framework

Public Policy Impacts on Entrepreneurial Entry and Exit: A Real Options Framework

Real Options Analysis of Constructed Wetlands as Nature-Based Solutions to Wastewater Treatment Under Multiple Uncertainties: A Case Study in the Philippines

Constructed wetlands (CWs) are man-made ecosystems that mimic the properties of natural wetlands. They are being utilized to treat various types of wastewater, from domestic to agricultural, municipal, commercial, and industrial effluents. Despite their economic viability and environmental benefits, their widespread adoption is challenged with several uncertainties, including public support, technology learning, and the impacts of climate change. This study proposes a valuation framework that considers these uncertainties to analyze the feasibility of CWs. Using existing CWs in the Philippines as a case, this study employs the real options approach to (1) evaluate the feasibility of CW projects using cost–benefit analysis, (2) calculate the value of postponing decisions to implement CWs projects using real options analysis, and (3) identify the optimal investment decisions for CWs considering the opportunity costs of waiting and uncertainties in public support and the impacts of climate change. Results found that the project is feasible with a net present value of USD 88,968. Yet, the real options value at USD 208,865 indicates that postponing the project may be a more optimal decision. Considering the cost of waiting, the valuation identified the threshold at 5.56% to immediately implement the project. The calculated values increase with uncertainty in public support but decrease with uncertainty in climate change’s impacts. Yet, these uncertainties prolong the decision to implement CW projects until they are resolved. The findings from this case study provide a basis for recommendations to support the adoption of CWs as nature-based water treatment for a more sustainable future.

Wealth maximisation and residential energy-efficiency retrofits: Insights from a real options model

The slow adoption of residential energy-efficiency retrofits continues to hamper the energy transition. We study incentives for adoption by proposing a model of optimal investment under uncertainty where the wealth-maximising agent has the option to delay. Stochastic portfolio returns and energy prices are taken into account. An extension of the model where the energy carrier is switched, e.g. from gas to electricity, is also considered. Exercise boundaries for the optimal stopping problem are estimated numerically for recent case studies of German buildings. Investment is generally not optimal at current energy prices and market conditions. Increasing correlation between gas and electricity prices erodes the value of technology switching. Comparative statics reveal that energy-efficiency investments become optimal at relatively lower energy prices as wealth, income, and savings behaviour increase, and portfolio drift and volatility decrease. Consequently, incentive to invest in retrofits is far more heterogeneous along wealth dimensions than standard discounted cash flow analyses suggest. An examination of retrofit subsidies demonstrates how free-riding by wealthier agents occurs when subsidies are not appropriately targeted. We also show that the pursuit of economic efficiency in subsidy design might have regressive effects on the wealth distribution.

A compound real options framework for optimal project portfolio allocation under uncertainty: The case of marginal field development under reservoir and price uncertainty

A compound real options framework for optimal project portfolio allocation under uncertainty: The case of marginal field development under reservoir and price uncertainty

Mifepristone-Misoprostol Regimen vs. Surgical Abortion: Evaluating Pregnancy Termination Options in Bangladesh

Background: Access to safe and effective abortion services plays a vital role in safeguarding women's reproductive health, ultimately contributing to their overall well-being. This is particularly relevant in Bangladesh, where the legality of abortion is contingent upon specific circumstances. Therefore, ensuring women have the autonomy to choose between safe and effective termination methods becomes crucial. Objective: The study aims to see explore the efficacy, safety, and accessibility of mifepristone-misoprostol regimen and surgical abortion methods within the context of Bangladesh. Methods: This investigation employed a cross-sectional observational design, conducted within the Department of Obstetrics and Gynecology at Dhaka National Medical College in Bangladesh. The study spanned one year, commencing in March 2023 and concluding in February 2024. To ensure a representative sample of the patient population seeking abortion services, consecutive sampling was utilized. This approach involved recruiting all patients admitted during the designated timeframe who fulfilled the pre-established inclusion and exclusion criteria. Ultimately, the study enrolled 104 participants, a sample size determined by the number of admissions fitting the criteria within the one year. Results: The study found no significant difference in age distribution between women choosing medical or surgical abortion, with both groups mainly consisting of women aged 18-25. Overall complication rates were similar, but medical abortion had a higher need for additional procedures and longer stays, while surgical abortion required more bleeding observation. Pain experiences differed significantly, with no women in the medical group reporting no pain and a higher prevalence of moderate pain compared to surgical abortion. Women undergoing medical abortion were slightly more likely to experience complications overall, and primigravid women (first pregnancy) were significantly more likely to experience complications than multigravid women. Conclusion: Our findings suggest comparable safety profiles for both surgical and medical abortion procedures within the studied population. This indicates that surgical abortion can be a safe and effective option alongside medical abortion, potentially expanding the range of choices offered to women.

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.

Data-driven corporate growth: A dynamic financial modelling framework for strategic agility

This research aimed to develop a Dynamic Financial Growth Model (DFGM) to enhance corporate growth by promoting strategic agility through data-driven decision-making. The main objective was to optimize corporate value by integrating real-time data, dynamic decision-making, risk management, and scenario analysis. The research employed a mathematical modelling framework that combined predictive analytics, real options theory, and scenario-based optimization to represent dynamic corporate financial decisions. The numerical example demonstrated how the model adjusts strategic decisions in response to changes in market data and evaluates corporate value under optimistic, pessimistic, and baseline scenarios. The main results indicated that the DFGM is effective in optimizing corporate value by allowing for continuous adjustments and strategic flexibility, distinguishing itself from traditional static financial models that lack real-time adaptability. The findings highlighted the value of incorporating risk constraints and scenario analysis, resulting in a balanced approach that manages both growth and uncertainty. However, the study identified limitations, including the need for empirical validation, more complex predictive analytics, and accounting for behavioral factors affecting decision-making. The conclusion emphasizes that the DFGM provides an adaptable and data-driven framework that enhances corporate strategic agility, making it a valuable tool for managing growth in rapidly changing environments, while also suggesting future research to refine the model's practical application

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.