Real Options And Applications Under Fractional Brownian Environment

With the development and changes of the market economy, the uncertainty of decisions is increasing. The method of the traditional decisions can not satisfy the need of companies’investment decisions, which don’t well change along with market environment, neglect often the value of the investment opportunities, such as the irreversibility, the uncertainty and the delay of a project. The approach of the real option analysis makes up for the inadequacies of the traditional evaluation method, which provides a new view of thinking for corporate investment decisions.In the applications of real options, this paper introduces a fractional Brownian motion in the real option pricing method. First, we introduce the theory of financial option and the application field of real options. Next we assess the value of the real options under fractional Brownian environment according to case study. In a valuation of the M&A, the valuation of underlying asset under a fractional Brownian motion is more accurate than that based on standard Brownian motion in reality, which provides a new perspective for the valuation of the M&A. In a capital budgeting, the real options valuation method is involved in the managerial flexibility of a project, which increases the evaluating value of a project. Compared the real option analysis method based on a standard Brownian motion, the real option technique under a fractional Brownian environment considers the fractal characteristics of the underlying asset price movement. Through an empirical analysis, we show that the analysis result is more practical under the managerial flexibility, which embodies the market characteristics, so a new perspective is provided in the valuation and managerial decision-making of a project. In designing the terms of dynamic alliance, this paper applies the real options method to the design of the default clause in dynamic alliance, and then analyzes the liquidated damages rate when breaching the terms of the fixed price contract under an agreement, whose rationality can promote the alliance’s stability. The result shows that the Hurst index does affect the size of a liquidated damages ratio between supplier and demander, the ratio increases with the Hurst exponent, and the supplier should be greater than the demander when increasing the rate of liquidated damages, which reflects the equality of the contractual obligations.Finally, the conclusions and future studies are given.