Influential Article Review - A Binomial Compound Option Approach to Modeling Sequential R&D Investments

This paper examines research and development. We present insights from a highly influential paper. Here are the highlights from this paper: In this paper, we propose a binomial approach to modeling sequential R&D investments. More specifically, we present a compound real options approach, simplifying the existing valuation methodology. Based upon the same set of assumptions as prior models, we show that the number of computational steps for valuing any compound option can be reduced to a single step. We demonstrate the applicability of our approach using the real-world example of valuing a new drug application. Overall, our work provides a heuristic framework for fostering the adoption of binomial compound option valuation techniques in R&D management. For our overseas readers, we then present the insights from this paper in Spanish, French, Portuguese, and German

A Model for Evaluating Pharmaceutical R&D Investment Projects under Technical and Economic Uncertainties

This study sets up a compound option approach for evaluating pharmaceutical R&D investment projects in the presence of technical and economic uncertainties. Technical uncertainty is modeled as a Poisson jump that allows for failure and thus abandonment of the drug development. Economic uncertainty is modeled as a standard di¤usion process which incorporates both up-and downward shocks. Practical application of this method is emphasized through a case analysis. We show that both uncertainties have a positive impact on the R&D option value. Moreover, from the sensitivity analysis, we nd that the sensitivity of the option with respect to economic uncertainty and market introduction cost decreases when technical uncertainty increases

The valuation of new ventures

Traditional tools fail to capture the value of new ventures, such as R&D projects and start-up companies, because of their dependence on future events that are uncertain at the time of the initial decision. In the real options setting the value of these investments is the value of the follow-on opportunities they may create. Our aim is to study the multicompound option approach to value sequential investment opportunities taking into account multiple interactions among real options

Influential Article Review - A Comprehensive Study Distinguishing the Black and Scholes Framework

This paper examines business models. We present insights from a highly influential paper. Here are the highlights from this paper: The aim of the paper is to investigate the Black and Scholes model by providing an updated framework of the international literature on the topic, within the field of real option. The purpose of the research is to identify the relevant literature between 1999 and 2015, together with the most important perspectives on the Black and Scholes model as analysed by scholars, in order to provide a useful support to the academic community in their studies. The investigation was carried out only for its economic and corporate insights, with the objective of establishing the strong and weak points highlighted in the defined framework. The method used for the research was based on qualitative approach. International literature on the topic was examined through a research protocol. The research was developed by the identification of four keywords (Real Options Valuation, Real Options Assessment, Black and Scholes, Real Options Pricing) and searching them in two databases, with the purpose of obtaining a wide range of scientific contribution for the analysis. The paper presents an accurate review of the scientific contribution on the topic of the Black and Scholes model; it defines the fields of application, opportunities offered and issues relating to its application, in order to clarify the strong and weak points of the model. The Black and Scholes model of the 1970s is acknowledged to be the most widely used model for evaluating options. Our study shows that this method has been adopted by decision-makers not only for evaluating options but also in other fields. For our overseas readers, we then present the insights from this paper in Spanish, French, Portuguese, and German

Development path and capital structure of belgian biotechnology firms

This study investigates the relationship between the evolution of real options values and associated financing policies for Belgian companies in the sector of bio-industries. Each firm's situation regarding the relevant types of real options is stylistically represented through a scenario tree. The consumption of a time-to-build or a growth option is respectively considered as a success or a failure in company development. Empirically, several variables enable us to locate each company along the tree at any time. The study of transitions leads us to discover that failures tend to trigger higher leverage, unlike in the trade-off theory. Yet, the increases in debt maturity, in lease and in convertible financing confirm our predictions. Overall, we emphasize evidence of undercapitalization and of proper, yet insufficient, use of hybrid financing by biotech companies.

The impact of postharvest research

While research on the improvement of agricultural production has received considerable attention and funding, until recently postharvest activities have not attracted much attention from international research organizations. However, there is an emerging consensus on the critical role that postharvest systems can play in meeting the overall goals of food security, poverty alleviation and sustainable agriculture particularly in developing countries. This study provides preliminary evidence on the impact of postharvest research on these goals; furthermore the study argues that postharvest research at international agricultural research organizations is justified by its international public good nature.postharvest technology ,food security ,Poverty alleviation ,Research institutes ,postharvest technology ,

Adaptive and flexible approaches for water resources planning under uncertainty

Planning for water supply infrastructure includes identifying interventions that cost-effectively secure an acceptably reliable water supply. In investigating a range of feasible interventions, water planners are challenged by two main factors. First, uncertainty is inherent in the predictions of future demands and supplies due for example to hydrological variability and climate change. This makes fixed invest-ment plans brittle as they are likely to fail if future conditions turn out to be different than assumed. Therefore, adaptability to changing future conditions is increasingly viewed as a valuable strategy of water planning. However, there is a lack of approaches that explicitly seek to enhance the adaptivity of water resource system developments. Second, water resource system development typically af¬fects multiple societal groups with at times competing interests. The diversity of objectives in water resource systems mean that considering trade-offs between competing objectives implied by the highest performing interventions is useful. Nonetheless, few multi-objective applications have aimed at adaptive scheduling of interventions in long-term water resource planning. This thesis introduces two novel decision-making approaches that address these two challenges in turn. Both approaches apply principles of real option analysis via two different formulations (1) a multistage stochastic mathematical programme and (2) a multi-objective evolutionary algorithm coupled to a river basin simula¬tion. In both cases, a generalised scenario tree construction algorithm is used to efficiently approximate the probabilistic uncertainty. The tree consists of possible investment paths with multiple decision stages to allow for frequent and regu¬lar modifications to the investment strategies. Novel decision-relevant metrics of adaptivity and flexibility are introduced, evolving their definition in the context of water resources planning. The approaches are applied to London’s urban water resources planning problem. Results from this thesis demonstrate that there is value in adopting adaptive and flexible plans suggesting that flexibility in activating, delaying and replacing en-gineering projects should be considered in water supply intervention scheduling. To evaluate the implementation of Real Option Analysis (ROA), the use of two metrics is proposed: the Value of the Stochastic Solution (VSS) and the Expected Value of Perfect Information (EVPI) that quantify the value of adopting adaptive and flexible plans respectively. The investment decisions results are a mixture of ‘long-term’ and ‘contingency schemes’ that are optimally chosen considering different futures. The VSS shows that by considering uncertainty, adaptive invest-ment decisions avoid £100 million NPV cost, 15% of the total NPV. The EVPI demonstrates that optimal delay and early decisions have £50 million NPV, 6% of total NPV. Additionally, a comparison study of alternative optimisation approaches to water supply capacity expansion problem demonstrate that there is benefit in waiting to allow for improvements around supply uncertainty in the case of London’s urban water resources planning problem. The results from the case study suggest that the proposed adaptive planning approach achieves substantial improvement in performance compared to alternative optimisation approaches with fixed plans saving more than £377 million, reducing NPV cost by 35%. Using a multi-objective multi-stage real-options formulation of the water planning problem, the trade-offs between a long-term water management plan’s resilience and its financial costs under supply and demand uncertainty are explored. The set of trade-off solutions consist of different investment plans that are adaptive to demand growth, approximated by a scenario tree, while robust to the effects of climate change supply uncertainty, represented by an ensemble of supply (hydro-logical) scenarios. Results show that, by being adaptive to demand uncertainty, the total NPV of the most resilient plans is lowered by 58.7%. The value in de¬laying investments by waiting for more accurate supply and demand estimates is 28.9% of total NPV. It should be noted that the results from the case study are indicative and should not be considered prescriptively as they are based in a simplified representation of London’s water supply system and should be further tested with the more detailed simulation model employed by the water utility which includes the latest proposed option designs, includes requirements to supply neighbouring water utilities, and considers more objectives

Valuing infrastructure investments as portfolios of interdependent real options

The value of infrastructure investments is frequently influenced by enormous uncertainty surrounding both exogenous and endogenous factors. At the same time, however, their value is generally driven by much flexibility - i.e. options - with respect to design, financing, construction and operation. Real options analysis aims to pro-actively manage risks by valuing the flexibilities inherent in uncertain investments. Although real options generally occur within portfolios whose value is affected by both exogenous and endogenous uncertainty, most existing valuation approaches focus on single (i.e. individual) options and consider only exogenous uncertainty. In this thesis, we introduce an approach for modelling and approximating the value of portfolios of interdependent real options under exogenous uncertainty, using both influence diagrams and simulation-and-regression. The key features of this approach are that it translates the interdependencies between real options into linear constraints and then integrates these in a portfolio optimisation problem, formulated as a multi-stage stochastic integer programme. To approximate the value of this optimisation problem we present a transparent valuation algorithm based on simulation and parametric regression that explicitly takes into account the state variable's multidimensional resource component. We operationalise this approach using three numerical examples of increasing complexity: an American put option in a simple single-factor setting; a natural resource investment with a switching option in a one-factor setting; and the same investment in a three-factor setting. Subsequently, we demonstrate the ability of the proposed approach to evaluate a complex natural resource investment that features both a large portfolio of interdependent real options and four underlying uncertainties. We show how our approach can be used to investigate the way in which the value of that portfolio and its individual real options are affected by the underlying operating margin and the degrees of different uncertainties. Lastly, we extend this approach to include endogenous, decision- and state-dependent uncertainties. We present an efficient valuation algorithm that is more transparent than those used in existing approaches; by exploiting the problem structure it explicitly accounts for the path dependencies of the state variables. The applicability of the extended approach to complex investment projects is illustrated by valuing an urban infrastructure investment. We show the way in which the optimal value of the portfolio and its single, well-defined options are affected by the initial operating revenues, and by the degrees of exogenous and endogenous uncertainty.Open Acces