IDEAS home Printed from https://ideas.repec.org/a/bla/jacrfn/v20y2008i2p129-143.html
   My bibliography  Save this article

Real Options Valuation: A Case Study of an E‐commerce Company

Author

Listed:
  • Rocío Sáenz‐Diez
  • Ricardo Gimeno
  • Carlos De Abajo

Abstract

This paper presents a real options valuation model with original solutions to some issues that arise frequently when trying to apply these models to real‐life situations. The authors build on existing models by introducing an innovative and intuitive risk neutral adjustment that allows us to work with all the simulated paths. The problem of incorporating real options into each path is solved with a “nearest neighbors” technique, and uncertainty is simulated using a beta distribution that adapts better to company‐specific information. The model is then applied to a real life e‐commerce company to produce the following insights: the expanded present value is higher than the traditional present value; the presence of several real options make them interact so that their values are nonadditive; and part of the expanded present value is explained by the presence of “Jensen's inequality” that stems from the “convexity” between the value of each year's cash flow and the uncertain variables.

Suggested Citation

  • Rocío Sáenz‐Diez & Ricardo Gimeno & Carlos De Abajo, 2008. "Real Options Valuation: A Case Study of an E‐commerce Company," Journal of Applied Corporate Finance, Morgan Stanley, vol. 20(2), pages 129-143, March.
    • Handle: RePEc:bla:jacrfn:v:20:y:2008:i:2:p:129-143
    DOI: 10.1111/j.1745-6622.2008.00187.x
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/j.1745-6622.2008.00187.x
    Download Restriction: no
    File URL: https://libkey.io/10.1111/j.1745-6622.2008.00187.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Trigeorgis, Lenos, 1993. "The Nature of Option Interactions and the Valuation of Investments with Multiple Real Options," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(1), pages 1-20, March.
    2. Cortazar, Gonzalo & Schwartz, Eduardo S., 1998. "Monte Carlo evaluation model of an undeveloped oil field," Journal of Energy Finance & Development, Elsevier, vol. 3(1), pages 73-84.
    3. repec:bla:ecnote:v:33:y:2004:i:1:p:23-54 is not listed on IDEAS
    4. Thomas E. Copeland & Vladimir Antikarov, 2005. "Real Options: Meeting the Georgetown Challange," Journal of Applied Corporate Finance, Morgan Stanley, vol. 17(2), pages 32-51, March.
    5. Schwartz, Eduardo S & Moon, Mark, 2001. "Rational Pricing of Internet Companies Revisited," The Financial Review, Eastern Finance Association, vol. 36(4), pages 7-25, November.
    6. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    7. Alex Triantis & Adam Borison, 2001. "Real Options: State Of The Practice," Journal of Applied Corporate Finance, Morgan Stanley, vol. 14(2), pages 8-24, June.
    8. Alexander J. Triantis, 2000. "Real Options And Corporate Risk Management," Journal of Applied Corporate Finance, Morgan Stanley, vol. 13(2), pages 64-73, June.
    9. Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," University of California at Los Angeles, Anderson Graduate School of Management qt43n1k4jb, Anderson Graduate School of Management, UCLA.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    2. Augusto Castillo, 2004. "Firm and Corporate Bond Valuation: A Simulation Dynamic Programming Approach," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 41(124), pages 345-360.
    3. Penizzotto, F. & Pringles, R. & Olsina, F., 2019. "Real options valuation of photovoltaic power investments in existing buildings," Renewable and Sustainable Energy Reviews, Elsevier, vol. 114(C), pages 1-1.
    4. Gordon Sick & Andrea Gamba, 2010. "Some Important Issues Involving Real Options: An Overview," Multinational Finance Journal, Multinational Finance Journal, vol. 14(1-2), pages 73-123, March-Jun.
    5. Maier, Sebastian & Pflug, Georg C. & Polak, John W., 2020. "Valuing portfolios of interdependent real options under exogenous and endogenous uncertainties," European Journal of Operational Research, Elsevier, vol. 285(1), pages 133-147.
    6. repec:dau:papers:123456789/1046 is not listed on IDEAS
    7. Zhang, Mingming & Zhou, Dequn & Zhou, Peng, 2014. "A real option model for renewable energy policy evaluation with application to solar PV power generation in China," Renewable and Sustainable Energy Reviews, Elsevier, vol. 40(C), pages 944-955.
    8. Dimitrakopoulos, Roussos G. & Abdel Sabour, Sabry A., 2007. "Evaluating mine plans under uncertainty: Can the real options make a difference?," Resources Policy, Elsevier, vol. 32(3), pages 116-125, September.
    9. Ravi Kashyap, 2016. "Options as Silver Bullets: Valuation of Term Loans, Inventory Management, Emissions Trading and Insurance Risk Mitigation using Option Theory," Papers 1609.01274, arXiv.org, revised Mar 2022.
    10. Andrejs Čirjevskis, 2021. "Value Maximizing Decisions in the Real Estate Market: Real Options Valuation Approach," JRFM, MDPI, vol. 14(6), pages 1-19, June.
    11. Kuangyuan Zhang & Richard Olawoyin & Antonio Nieto & Andrew N. Kleit, 2018. "Risk of commodity price, production cost and time to build in resource economics," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 20(6), pages 2521-2544, December.
    12. Savolainen, Jyrki, 2016. "Real options in metal mining project valuation: Review of literature," Resources Policy, Elsevier, vol. 50(C), pages 49-65.
    13. Atul Chandra & Peter R. Hartley & Gopalan Nair, 2022. "Multiple Volatility Real Options Approach to Investment Decisions Under Uncertainty," Decision Analysis, INFORMS, vol. 19(2), pages 79-98, June.
    14. Pringles, Rolando & Olsina, Fernando & Garcés, Francisco, 2015. "Real option valuation of power transmission investments by stochastic simulation," Energy Economics, Elsevier, vol. 47(C), pages 215-226.
    15. Ravi Kashyap, 2022. "Options as Silver Bullets: Valuation of Term Loans, Inventory Management, Emissions Trading and Insurance Risk Mitigation using Option Theory," Annals of Operations Research, Springer, vol. 315(2), pages 1175-1215, August.
    16. Weihan Li & Jin E. Zhang & Xinfeng Ruan & Pakorn Aschakulporn, 2024. "An empirical study on the early exercise premium of American options: Evidence from OEX and XEO options," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 44(7), pages 1117-1153, July.
    17. Pringles, Rolando & Olsina, Fernando & Penizzotto, Franco, 2020. "Valuation of defer and relocation options in photovoltaic generation investments by a stochastic simulation-based method," Renewable Energy, Elsevier, vol. 151(C), pages 846-864.
    18. Stentoft, Lars, 2005. "Pricing American options when the underlying asset follows GARCH processes," Journal of Empirical Finance, Elsevier, vol. 12(4), pages 576-611, September.
    19. O. Samimi & Z. Mardani & S. Sharafpour & F. Mehrdoust, 2017. "LSM Algorithm for Pricing American Option Under Heston–Hull–White’s Stochastic Volatility Model," Computational Economics, Springer;Society for Computational Economics, vol. 50(2), pages 173-187, August.
    20. Lars Stentoft, 2008. "American Option Pricing Using GARCH Models and the Normal Inverse Gaussian Distribution," Journal of Financial Econometrics, Oxford University Press, vol. 6(4), pages 540-582, Fall.
    21. Nteukam T., Oberlain & Planchet, Frédéric, 2012. "Stochastic evaluation of life insurance contracts: Model point on asset trajectories and measurement of the error related to aggregation," Insurance: Mathematics and Economics, Elsevier, vol. 51(3), pages 624-631.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:jacrfn:v:20:y:2008:i:2:p:129-143. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=1078-1196 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.