Valuation Study Of Real Options Embedded In Project Investment

Under dynamic and uncertain business environment, the business decision must be able to make the policy of strategic investment, the valuation of investment opportunities and the project investment cost flexibly. But the traditional analysis method neglected these flexibilities, caused the project or the strategic value directly was underestimated seriously. Fortunately, the real options method was developed.Firstly the paper first synthesizes some representative analysis frame, and improves the rougher and the insufficient part, and constructs a new real options analysis frame which is clearer and easy to operate.According to the no-competitors assumption problem of previous real option model, the paper adopt jump, which follows Poisson process, to describe various types of rare events (jumps), especial the competitors, they will influence the value of real options when happened, and finally establish valuation model based on a mixed jump-diffusion process.Then, at the aspect of real options model's pricing method, according to the problem that traditional Monte-Carlo simulation method can't be applied to American real option, the paper adopt the Least Squares Monte Carlo method which is used in financial option to American real option, and establish valuation model of investment project combining with dynamic programming.Finally, the paper use a foregoing risk investment project which includes option to grow in some medicine company, to explain how to apply the real options analysis framework; and compare the simulation results with Log-transformed Binomial Lattice, date analysis prove the stability and validity of new model. The paper also makes the sensitivity analysis and focus on discussing the exogenous competitors how to impact option value. The results show that the higher the jump frequency of competitors, the bigger the impact amplitude for project value, and the option valuation will become more less and it also match the intuition perfectly. But there is one critical point which is different with financial option, that is, both the increments of continuous volatility and the one of discrete volatility, will cause the decrement of option value. The real option is a useful reference to make project decision.