Issue: 2017/Vol.27/No.2, Pages 91-111
VALUING MANAGERIAL FLEXIBILITY. AN APPLICATION OF REAL-OPTION THEORY TO STEEL INDUSTRY INVESTMENTS
Bogdan Rębiasz
, Bartłomiej Gaweł, Iwona Skalna
Cite as: B. Rębiasz, B. Gaweł, I. Skalna. Valuing managerial flexibility. An application of real-option theory to steel industry investments. Operations Research and Decisions 2017: 27(2), 91-111. DOI 10.5277/ord170206
Abstract
In the steel industry which is subject to significant volatility in its output prices and market demands for different ranges of products the diversification of production can generate important value for switch real options. Therefore, a common practice is to invest in various assets, thus generating the possibility of diversification of production and valuable switch options. The incremental benefit of product switch options in steel plant projects has been assessed. Such options are valued using the Monte Carlo simulation and modeling the prices of and demand for steel products as geometric Brownian motion (GBM). Our results show that this option can generate a significant increase in the net present value (NPV) of metallurgical projects.
Keywords: real options, switch options, stochastic processes, investment decision, Monte Carlo simulation
Received: 4 December 2016 Accepted: 18 April 2017