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Valuing Flexibility as a Complex Option
Alexander J. Triantis and James E. Hodder
The Journal of Finance
Vol. 45, No. 2 (Jun., 1990), pp. 549-565
Stable URL: http://www.jstor.org/stable/2328669
Page Count: 17
You can always find the topics here!Topics: Production technology, Net present value, Finance, Standard deviation, Profit margins, Financial investments, Fixed costs, Market portfolios, Dedicated systems, Product mixes
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This paper develops an approach for valuing flexible production systems using contingent claims pricing. Demand curves for our model's underlying assets (output products) may be downward sloping, in contrast with the standard option pricing assumption. Also, our marginal production(exercise) costs may be increasing. In addition, we allow for multiple products and a production capacity constraint. These elements of the model result in complex exercise decisions for the contingent claims which comprise the production system's value. We illustrate our approach by valuing a flexible system that produces two products which have profit margin functions with stochastic parameters.
The Journal of Finance © 1990 American Finance Association