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Decision Analysis and Real Options: A Discrete Time Approach to Real Option Valuation

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  • Luiz Brandão
  • James Dyer

Abstract

In this paper we seek to enhance the real options methodology developed by Copeland and Antikarov (2001) with traditional decision analysis tools to propose a discrete time method that allows the problem to be specified and solved with off the shelf decision analysis software. This method uses dynamic programming with an innovative algorithm to model the project’s stochastic process and real options with decision trees. The method is computationally intense, but simpler and more intuitive than traditional methods, thus allowing for greater flexibility in the modeling of the problem. Copyright Springer Science + Business Media, Inc. 2005

Suggested Citation

  • Luiz Brandão & James Dyer, 2005. "Decision Analysis and Real Options: A Discrete Time Approach to Real Option Valuation," Annals of Operations Research, Springer, vol. 135(1), pages 21-39, March.
    • Handle: RePEc:spr:annopr:v:135:y:2005:i:1:p:21-39:10.1007/s10479-005-6233-9
    DOI: 10.1007/s10479-005-6233-9
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    References listed on IDEAS

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    4. James E. Smith & Robert F. Nau, 1995. "Valuing Risky Projects: Option Pricing Theory and Decision Analysis," Management Science, INFORMS, vol. 41(5), pages 795-816, May.
    5. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
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