The Sunk Cost and the Real Option Pricing Model
Although the academic literature on real options has grown enormously over the past three decades, hitherto an accurate real option pricing model has not been developed for investment decision analyses. In this paper, we propose a real option pricing model based on sunk cost characteristics, which c...
Saved in:
| Main Authors: | , , |
|---|---|
| Format: | Article |
| Language: | English |
| Published: |
Wiley
2021-01-01
|
| Series: | Complexity |
| Online Access: | http://dx.doi.org/10.1155/2021/3626000 |
| Tags: |
Add Tag
No Tags, Be the first to tag this record!
|
| _version_ | 1832561517802815488 |
|---|---|
| author | Songsong Li Yinglong Zhang Xuefeng Wang |
| author_facet | Songsong Li Yinglong Zhang Xuefeng Wang |
| author_sort | Songsong Li |
| collection | DOAJ |
| description | Although the academic literature on real options has grown enormously over the past three decades, hitherto an accurate real option pricing model has not been developed for investment decision analyses. In this paper, we propose a real option pricing model based on sunk cost characteristics, which can estimate the value of real options more accurately. First, we explore the distinctive features that distinguish real options from financial options. The study shows that the distinguishing feature of the real options is the sunk cost, which does not exist in the financial options. Based on the sunk cost characteristic of real options, we find that the exercise conditions of real and financial options are different. Second, we introduce the sunk cost into the intrinsic value function of real options and establish a new real option pricing model. Finally, this paper also discusses the properties of the intrinsic value function and pricing model of real options. We find that the application of the Black–Scholes option pricing model will overestimate the value of real options. |
| format | Article |
| id | doaj-art-aa779d863e2e432085eb6cf6d19937be |
| institution | Kabale University |
| issn | 1076-2787 1099-0526 |
| language | English |
| publishDate | 2021-01-01 |
| publisher | Wiley |
| record_format | Article |
| series | Complexity |
| spelling | doaj-art-aa779d863e2e432085eb6cf6d19937be2025-02-03T01:24:48ZengWileyComplexity1076-27871099-05262021-01-01202110.1155/2021/36260003626000The Sunk Cost and the Real Option Pricing ModelSongsong Li0Yinglong Zhang1Xuefeng Wang2School of Management, Harbin Institute of Technology, 92 West Dazhi Street, Nangang District, Harbin 150001, ChinaSchool of Management, Harbin Institute of Technology, 92 West Dazhi Street, Nangang District, Harbin 150001, ChinaSchool of Management, Harbin Institute of Technology, 92 West Dazhi Street, Nangang District, Harbin 150001, ChinaAlthough the academic literature on real options has grown enormously over the past three decades, hitherto an accurate real option pricing model has not been developed for investment decision analyses. In this paper, we propose a real option pricing model based on sunk cost characteristics, which can estimate the value of real options more accurately. First, we explore the distinctive features that distinguish real options from financial options. The study shows that the distinguishing feature of the real options is the sunk cost, which does not exist in the financial options. Based on the sunk cost characteristic of real options, we find that the exercise conditions of real and financial options are different. Second, we introduce the sunk cost into the intrinsic value function of real options and establish a new real option pricing model. Finally, this paper also discusses the properties of the intrinsic value function and pricing model of real options. We find that the application of the Black–Scholes option pricing model will overestimate the value of real options.http://dx.doi.org/10.1155/2021/3626000 |
| spellingShingle | Songsong Li Yinglong Zhang Xuefeng Wang The Sunk Cost and the Real Option Pricing Model Complexity |
| title | The Sunk Cost and the Real Option Pricing Model |
| title_full | The Sunk Cost and the Real Option Pricing Model |
| title_fullStr | The Sunk Cost and the Real Option Pricing Model |
| title_full_unstemmed | The Sunk Cost and the Real Option Pricing Model |
| title_short | The Sunk Cost and the Real Option Pricing Model |
| title_sort | sunk cost and the real option pricing model |
| url | http://dx.doi.org/10.1155/2021/3626000 |
| work_keys_str_mv | AT songsongli thesunkcostandtherealoptionpricingmodel AT yinglongzhang thesunkcostandtherealoptionpricingmodel AT xuefengwang thesunkcostandtherealoptionpricingmodel AT songsongli sunkcostandtherealoptionpricingmodel AT yinglongzhang sunkcostandtherealoptionpricingmodel AT xuefengwang sunkcostandtherealoptionpricingmodel |