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The Impact Of Volatility And Technological Uncertainty On Growth Options And R&D Decision

Posted on:2005-02-22Degree:MasterType:Thesis
Country:ChinaCandidate:Z H SunFull Text:PDF
GTID:2156360152467377Subject:Probability theory and mathematical statistics
Abstract/Summary:PDF Full Text Request
The real option is a very important means of the evaluation and the strategicdecision. It is a method and technique which put the financial option estimate to thereal investment and it be widely applied to the investment of the natural resources,high-new technology, R&D and so on. R&D is very important to the operation and the management of a company. It is along period from starting the research to the market products. And it has so manyuncertain factors. So the managers can choose the stage according to the actualinformation. For example, continue the R&D, expand or contract the scale, shut downthe following stage works. Because of the similar of the R&D and the option market,the option methods can be used to evaluate the R&D. It is more scientific. Theadvanced research of the real option methods can keep us following the internationalresearch of the management science. We can improve the management level and theinternational competition of our companies. There are many kinds of real options. Growth option is one kind of it. This paperuses a canonical growth option model to analysis the rejection of the option to thevolatility. It determines that the growth option value increase in σ if it is wellout-of-money, but decreases in σ if it is near- or in-the-money. Managers of firmsholding a substantial number of at- or in-the-money growth options, such as those inthe Internet, biotechnology, computer, and pharmaceutical industries, are thereforejustified in continuing to shun increased market volatility, as are market analysis inthese sectors. The investment of R&D is different from the general. It is facing bothtechnological and economic uncertainty. This paper researches the optimal investmentstrategy under this condition. As in the Dixit product market model, sunk investment IIIcosts combined with uncertainty over market values cause the trigger point forinvestment to rise and that for abandonment to fall relative to their Marshallianequivalents. When considered the technological uncertainty, both trigger points areraise due to the irreversibility of the discovery itself. At the investment trigger the twoeffects reinforce one another and research activity is further delayer compared with theMarshallian benchmark. At the abandonment trigger, however, the 'discovery effect'counteracts the sunk cost effect and the project is abandoned more rapidly than wouldotherwise be the case. When sunk costs are sufficiently small and the expected speedof discovery is high, the second effect dominates and abandonment the takes placewhile expected profits are still positive.
Keywords/Search Tags:Real Options, Market Volatility, Technological Uncertainty, Growth Options, Hazard Rate
PDF Full Text Request
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