One of the most challenging issues in management is the valuation of strategic investments. Indeed, there are several kinds of projects, for example those concerning brand extension, R&D and IT, that are strongly affected by uncertainty, see e.g. Santos et al. (2014), Kalhagen and Elnegaard (2002), Charalamopoulos et al. (2011), Manley and Niquidet (2010), Bernardo et al. (2012) and Baldi and Trigeorgis (2009). When undertaking projects such as the aforementioned ones, which are characterized by a long-term horizon, a firm has also to face the risk due to the interest rates. In fact, interest rates do not remain constant over time but experience upand-down movements and volatility that may become significant especially in the long run. In this work, we propose to value investments subject to interest rate risk using a Real Option approach, see, e.g., Schulmerich (2010). In particular, we model interest rates according to a stochastic process of Vasicek type and we calibrate it to the Euribor/Eurirs indexes. Such a process is then integrated in a Black-Scholes framework, which allows us to obtain an explicit formula for valuing various kinds of investment strategies (such as option to defer and option to expand). A numerical application is presented that illustrates the proposed real option approach from the practical point-of-view.
Does the volatility of interest rates affect the value of investment projects? A real option investigation
Davide RadiUltimo
2014-01-01
Abstract
One of the most challenging issues in management is the valuation of strategic investments. Indeed, there are several kinds of projects, for example those concerning brand extension, R&D and IT, that are strongly affected by uncertainty, see e.g. Santos et al. (2014), Kalhagen and Elnegaard (2002), Charalamopoulos et al. (2011), Manley and Niquidet (2010), Bernardo et al. (2012) and Baldi and Trigeorgis (2009). When undertaking projects such as the aforementioned ones, which are characterized by a long-term horizon, a firm has also to face the risk due to the interest rates. In fact, interest rates do not remain constant over time but experience upand-down movements and volatility that may become significant especially in the long run. In this work, we propose to value investments subject to interest rate risk using a Real Option approach, see, e.g., Schulmerich (2010). In particular, we model interest rates according to a stochastic process of Vasicek type and we calibrate it to the Euribor/Eurirs indexes. Such a process is then integrated in a Black-Scholes framework, which allows us to obtain an explicit formula for valuing various kinds of investment strategies (such as option to defer and option to expand). A numerical application is presented that illustrates the proposed real option approach from the practical point-of-view.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.
