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Real Options: Batch Process And Market Entry/Exit Decisions Under Uncertainty

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  • CHIN-TSAI LIN

    (Ming Chuan University, Graduate School of Management, Chung Shan North Road, Section 5, Taipei, Taiwan, R.O.C.)

  • CHENG-RU WU

    (Ming Chuan University, Graduate School of Management, Chung Shan North Road, Section 5, Taipei, Taiwan, R.O.C.)

Abstract

Under uncertainty of exchange rate, we extend the batch process production model of Linet al. (2002) by considering an export-oriented manufacturer making decisions to switch freely between domestic and foreign locations. The export-oriented manufacturer is risk neutral and has rational expectations. We use dynamic programming and Lagrange multiplies for a stochastic optimization control problem to get the productive value of exporter produces in domestic and foreign locations. Next, the export-oriented manufacturer can make decision regarding the optimal entry (exit) trigger for transferable locations wherever the product locations are. It provides the supplier with another way to make decisions.

Suggested Citation

  • Chin-Tsai Lin & Cheng-Ru Wu, 2004. "Real Options: Batch Process And Market Entry/Exit Decisions Under Uncertainty," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 21(01), pages 35-52.
    • Handle: RePEc:wsi:apjorx:v:21:y:2004:i:01:n:s0217595904000023
    DOI: 10.1142/S0217595904000023
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    References listed on IDEAS

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    1. Jeffrey A. Frankel & Richard Meese, 1987. "Are Exchange Rates Excessively Variable?," NBER Chapters, in: NBER Macroeconomics Annual 1987, Volume 2, pages 117-162, National Bureau of Economic Research, Inc.
    2. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
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    Cited by:

    1. Shuang Xiao & Guo Li & Yunjing Jia, 2017. "Estimating the Constant Elasticity of Variance Model with Data-Driven Markov Chain Monte Carlo Methods," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 34(01), pages 1-23, February.
    2. Chen-Ru Wu & Chin-Tsai Lin, 2007. "Optimizing Location Among Three Countries Under Exchange Rate Uncertainty: Applying Real Options," Quality & Quantity: International Journal of Methodology, Springer, vol. 41(1), pages 1-17, February.

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