A Stochastic Control Framework for Real Options in Strategic Evaluation

The theoretical foundation for real options goes back to the mid 1980sand the development of a model that forms the basis for many currentapplications of real option theory. Over the last decade the theoryhas rapidly expanded and become enriched thanks to increasing researchactivity. Modern real option theory may be used for the valuation ofentire companies as well as for particular investment projects in thepresence of uncertainty. As such, the theory of real options can serveas a tool for more practically oriented decision making, providingmanagement with strategies maximizing its capital market value.This book is devoted to examining a new framework for classifying realoptions from a management and a valuation perspective, giving theadvantages and disadvantages of the real option approach. Impulsecontrol theory and the theory of optimal stopping combined withmethods of mathematical finance are used to construct arbitrarilycomplex real option models which can be solved numerically and whichyield optimal capital market strategies and values. Various examplesare given to demonstrate the potential of this framework.This work will benefit the financial community, companies, as well asacademics in mathematical finance by providing an important extensionof real option research from both a theoretical and practical point ofview.