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Valuing modularity as a real option

Author

Listed:
  • Andrea GAMBA

    (Departement of Economics, University of Verona)

  • Nicola FUSARI

    (University of Lugano and Swiss Finance Institute)

Abstract

We provide a general valuation approach for capital budgeting decisions involving the modularization of a system. Within the framework developed by Baldwin and Clark (2000), we implement an approach using a numerical procedure based on the Least Squares Monte Carlo method proposed by Longstaff and Schwartz (2001). The approach is accurate, general and flexible.

Suggested Citation

  • Andrea GAMBA & Nicola FUSARI, 2008. "Valuing modularity as a real option," Swiss Finance Institute Research Paper Series 08-20, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp0820
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    References listed on IDEAS

    as
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    5. Trigeorgis, Lenos & Tsekrekos, Andrianos E., 2018. "Real Options in Operations Research: A Review," European Journal of Operational Research, Elsevier, vol. 270(1), pages 1-24.
    6. Pascal Létourneau & Lars Stentoft, 2019. "Bootstrapping the Early Exercise Boundary in the Least-Squares Monte Carlo Method," JRFM, MDPI, vol. 12(4), pages 1-21, December.
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    8. Mo, Jianlei & Cui, Lianbiao & Duan, Hongbo, 2021. "Quantifying the implied risk for newly-built coal plant to become stranded asset by carbon pricing," Energy Economics, Elsevier, vol. 99(C).
    9. Ritu Agarwal & Amrit Tiwana, 2015. "Editorial—Evolvable Systems: Through the Looking Glass of IS," Information Systems Research, INFORMS, vol. 26(3), pages 473-479, September.
    10. David A. Broniatowski, 2017. "Flexibility Due to Abstraction and Decomposition," Systems Engineering, John Wiley & Sons, vol. 20(2), pages 98-117, March.
    11. Juan Pineiro-Chousa & Marcos Vizcaíno-González, 2020. "A mathematical model for the role of third party funding in reputation building of academic institutions," Review of Managerial Science, Springer, vol. 14(2), pages 365-377, April.
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    13. Mombello, Bruno & Olsina, Fernando & Pringles, Rolando, 2023. "Valuing photovoltaic power plants by compound real options," Renewable Energy, Elsevier, vol. 216(C).
    14. Daniel Gull, 2011. "Valuation of Discount Options in Software License Agreements," Business & Information Systems Engineering: The International Journal of WIRTSCHAFTSINFORMATIK, Springer;Gesellschaft für Informatik e.V. (GI), vol. 3(4), pages 221-230, August.
    15. Rainer Andergassen & Luigi Sereno, 2012. "Valuation of N-stage Investments Under Jump-Diffusion Processes," Computational Economics, Springer;Society for Computational Economics, vol. 39(3), pages 289-313, March.
    16. Pineiro-Chousa, Juan & Vizcaíno-González, Marcos, 2016. "A quantum derivation of a reputational risk premium," International Review of Financial Analysis, Elsevier, vol. 47(C), pages 304-309.
    17. Zixuan Zhang & Michail Chronopoulos & Dimitrina S. Dimitrova & Ioannis Kyriakou, 2024. "Risk assessment and optimal scheduling of serial projects," OR Spectrum: Quantitative Approaches in Management, Springer;Gesellschaft für Operations Research e.V., vol. 46(3), pages 709-736, September.
    18. Jafarizadeh, Babak, 2012. "Information acquisition as an American option," Energy Economics, Elsevier, vol. 34(3), pages 807-816.
    19. repec:grz:wpsses:2011-01 is not listed on IDEAS
    20. Spiros H. Martzoukos & Nayia Pospori & Lenos Trigeorgis, 2024. "Corporate investment decisions with switch flexibility, constraints, and path-dependency," Review of Quantitative Finance and Accounting, Springer, vol. 62(3), pages 1223-1250, April.
    21. David A. Broniatowski, 2018. "Building the tower without climbing it: Progress in engineering systems," Systems Engineering, John Wiley & Sons, vol. 21(3), pages 259-281, May.

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    More about this item

    Keywords

    Real options; Modularity; Least Squares Monte Carlo;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G3 - Financial Economics - - Corporate Finance and Governance

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