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Switch option: managing strategic investment in an uncertain world

Author

Listed:
  • Federica Cucchiella
  • Massimo Gastaldi

Abstract

It is widely accepted in literature that an increase in uncertainty should have an inhibiting effect on investment results. This paper shows that the concept of a negative 'uncertainty–investment' relationship is not always correct. In fact, the uncertainty can actually have a positive impact on investment by means of the real options approach. In this context, this paper deals with a theory useful to increase the performance of a Supply Chain (SC) operating in today's business environment full of uncertainty. Focusing the attention on a specific network two factors are assumed as the main sources of uncertainty: demand and technology change. A switch option is used to develop a new framework to quantify and maximise the expected Net Present Value (NPV). A numerical example and a sensitivity analysis of the option value are finally presented.

Suggested Citation

  • Federica Cucchiella & Massimo Gastaldi, 2008. "Switch option: managing strategic investment in an uncertain world," International Journal of Enterprise Network Management, Inderscience Enterprises Ltd, vol. 2(2), pages 167-184.
    • Handle: RePEc:ids:ijenma:v:2:y:2008:i:2:p:167-184
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