Application Of Option Pricing Theory To The Patent

As the market economy advances, it is increasingly significant in market that assessing the value of patent. Although traditional methods such as NPV play an important role in assessing the value, these methods have some constant deficiencies. For instance, they demand that all the investing decisions should be determined from the beginning. And managers can not change the methods of investing decisions during the project, which apparently doesn't meet the requirement of market changes. But option is a kind of right, which is made after knowing the result of the event. If the matters are going well, we make a decision. Otherwise, we make the opposite. It means that the payment of option is nonlinear, which will change with our decisions.Based on the traditional methods of patent assessment, the paper points out the limitations and shortcomings of traditional methods, and establishes the binomial tree model of patent pricing. At last, it illustrates the way of obtaining the parameters and the influence of the value of patent.First of all, the paper introduces the development of option pricing theory, real option pricing theory and the study of the patent assessment. After summarizing some basic theories of patent and option, we analyze deeply the option's characteristics of patent. And then, according to the shortages of traditional valuation method, we seem patent as American call option, and apply the binominal tree method to adjust the dividend rate at every stage. Finally, we take an example to explain the steps of the algorithm, and analyze the influence of relevant parameters' changes on the value of patents.