| Real options research draws analogy from financial options to the analysis of real world business decisions. Consequently, financial options pricing theory is used for real options valuation. However, one of the fundamental requirements of Black-Scholes options pricing theory--the tradability of the option's underlying asset, is often unfulfilled. Without the underlying asset's tradability, the option cannot be replicated and riskless hedging required for equilibrium pricing is not possible. There is some progress in developing new valuation methods for non-replicatible real options, but none of them seems dominating. Furthermore, current research fails to distinguish between non-replicatible options and non-hedged options. Two problems arise. First, some real options, though replicatible, are not hedged. Second, there is a possibility of early exercise for non-hedged options. The first part of this dissertation develops valuation theory for non-hedged options. Our result shows that, due to its early exercise possibility, the value of a non-hedged, non-transferable option is less than that of a hedged but otherwise equivalent option. This suggests that previous non-replicatible options valuation models may have overestimated non-hedged real options.; In the second part, this dissertation introduces the concept of new business (NB) options as a special type of growth options. Various business activities involving NB options are discussed, including mergers, acquisitions, joint ventures, and cooperative agreements, all of which have not been formally analyzed in real options research. This dissertation not only provides valuation theory for these activities, but also analyzes the strategic decision of choosing among them. The main objective is to highlight the impact of option consideration on the strategic decision of business combination. With some modifications, compound options theory is used for this strategic analysis. The results generally indicate that a form of business activity with imbedded options to form a more closely bound combination in the future, is generally preferred to an outright combination, unless the net benefit of the latter is significantly positive. Several secondary models and other results, implications, as well as suggestions for future research are also included in the dissertation. |
