Real Options In Investment Decisions In The Semiconductor Industry

The theory of real option is an application of financial option theory in investment decision. It is one of the most recently developed in the field. As an extension of the NPV method for traditional investment decision analysis, real option theory offers new approach and techniques, and sees increasing practical value. In China, research in real option is still at its beginning stage. Borrowing mainly upon foreign experience and practice and utilizing historical data, this thesis applies real option theory to build a decision model for investment in semiconductor industry. The model is analyzed to help decide whether to invest and the optimal timing of investment.The first chapter of this dissertation is a comprehensive review of research in real option. International literatures are examined first, with emphases on the emergence, the quantitative property, and the applications of the theory. Studies by Chinese scholars are then summarized. It can be seen that current focus is on the application to investment in information technology and R&D, and that application to investment in semiconductor industry remains unexplored.The second chapter introduces real option methods after showing shortcomings of traditional investment decision analysis. The emergence and development of real option theory bring about new approach and new technique to strategic investment decisions. This theory overcomes many defects of traditional ones, quantifies and materializes the investment decision process, and is applicable to many areas. This chapter introduces the various kinds of real options through concrete cases. The main differences between real and financial options are also shown at the end of the chapter.The general valuation models in real option constitute the third chapter. Because of the relation between real and financial options, a proper understanding of the latter isessential to that of the former. Therefore, a brief introduction to financial option valuation theory is given first. On the basis of this, the chapter presents detailed analyses of the application of the Binomial Option Valuation Model and the Black-Scholes Valuation Model in real options.Chapter four summarizes the economics of semiconductor industry upon an analysis of the development of this industry. Investment projects in semiconductor typically involve large uncertainty, higher inputs, greater market fluctuation, and more risk.Chapter five builds an investment decision model on the basis of historical data from the industry. This chapter models the value of investment project as geometric Brownian motion and uses contingent claim for the valuation. The model is used ^to determine the optimal timing of investment and the effects of parameters on modelresults are also examined. The impacts of r and S to V are tested with aMATLAB program. With the distinct feature of memory industry in the semiconductor industry, the chapter adopts mean reverting process to describe thevalue of investment project and uses MATLAB program to compute V*.Charter six gives main conclusions and future suggestion.