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Valuing managerial flexibility. An application of real-option theory to steel industry investments

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  • Bogdan Rębiasz
  • Bartłomiej Gaweł
  • Iwona Skalna

Abstract

In the steel industry which is subject to significant volatility in its output prices and market demands for different ranges of products the diversification of production can generate important value for switch real options. Therefore, a common practice is to invest in various assets, thus generating the possibility of diversification of production and valuable switch options. The incremental benefit of product switch options in steel plant projects has been assessed. Such options are valued using the Monte Carlo simulation and modeling the prices of and demand for steel products as geometric Brownian motion (GBM). Our results show that this option can generate a significant increase in the net present value (NPV) of metallurgical projects.

Suggested Citation

  • Bogdan Rębiasz & Bartłomiej Gaweł & Iwona Skalna, 2017. "Valuing managerial flexibility. An application of real-option theory to steel industry investments," Operations Research and Decisions, Wroclaw University of Science and Technology, Faculty of Management, vol. 27(2), pages 91-111.
    • Handle: RePEc:wut:journl:v:2:y:2017:p:91-111:id:1292
    DOI: 10.5277/ord170206
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    References listed on IDEAS

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    Cited by:

    1. Bogdan Rębiasz, 2019. "The valuation of real options in a hybrid environment," Operations Research and Decisions, Wroclaw University of Science and Technology, Faculty of Management, vol. 29(1), pages 97-119.
    2. Xiao, Chang & Florescu, Ionut & Zhou, Jinsheng, 2020. "A comparison of pricing models for mineral rights: Copper mine in China," Resources Policy, Elsevier, vol. 65(C).

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