Issue: 2019/Vol.29/No.1, Pages 97-119
THE VALUATION OF REAL OPTIONS IN A HYBRID ENVIRONMENT
Bogdan Rębiasz
Cite as: B. Rębiasz. The valuation of real options in a hybrid environment. Operations Research and Decisions 2019: 29(1), 97-119. DOI 10.5277/ord190106
Abstract
The aim of this paper is to present the possibilities and purposefulness of the application of fuzzy set theory to the valuation of real options. Owing to temporal fluctuations in the market, some input parameters in a model of a real option cannot always be expressed in a precise sense. Therefore, it is natural to consider them as a fuzzy numbers. Such an approach allows us to keep more information about the possible value of real options. A hybrid (fuzzy-stochastic) model for valuing a switch option is presented. Under these assumptions, the value of a switch option will be a fuzzy random set. This article assesses the incremental benefit of product switch options in steel plant projects. Such options are valued by Monte Carlo simulation and modelling the prices of and demand for steel products using fuzzy geometric Brownian motion. Finally, the value of a product switch option is defined by the upper and lower probability distribution function.
Keywords: switch options, fuzzy sets, random fuzzy sets, investment decision, Monte Carlo simulation
Received: 4 November 2017 Accepted: 8 February 2019