Real Options using Markov Chains: an application to Production Capacity Decisions

In this work we address investment decisions using real options. A standard numerical approach for valuing real options is dynamic programming. The basic idea is to establish a discrete-valued lattice of possible future values of the underlying stochastic variable (demand in our case). For most approaches in the literature, the stochastic variable is assumed normally distributed and then approximated by a binomial distribution, resulting in a binomial lattice. In this work, we investigate the use of a sparse Markov chain to model such variable. The Markov approach is expected to perform better since it does not assume any type of distribution for the demand variation, the probability of a variation on the demand value is dependent on the current demand value and thus, no longer constant, and it generalizes the binomial lattice since the latter can be modelled as a Markov chain. We developed a stochastic dynamic programming model that has been implemented both on binomial and Markov models. A numerical example of a production capacity choice problem has been solved and the results obtained show that the investment decisions are different and, as expected the Markov chain approach leads to a better investment policy.Flexible Capacity Investments, Real Options, Markov Chains, Dynamic Programming

A decision support system for TV self-promotion scheduling

This paper describes a Decision Support System (DSS) that aims to plan and maintain the weekly self-promotion space for an over the air TV station. The self-promotion plan requires the assignment of several self-promotion advertisements to a given set of available time slots over a pre-specified planning period. The DSS consists of a data base, a statistic module, an optimization module, and a user interface. The input data is provided by the TV station and by an external audiometry company, which collects daily audience information. The statistical module provides estimates based on the data received from the audiometry company. The optimization module uses a genetic algorithm that can find good solutions quickly. The interface reports the solution and corresponding metrics and can also be used by the decision makers to manually change solutions and input data. Here, we report mainly on the optimization module, which uses a genetic algorithm (GA) to obtain solutions of good quality for realistic sized problem instances in a reasonable amount of time. The GA solution quality is assessed using the optimal solutions obtained by using a branch-and-bound based algorithm to solve instances of small size, for which optimality gaps below 1% are obtained.This research had the support of COMPETE-FEDERPORTUGAL2020-POCI-NORTE2020-FCT funding via grants POCI-01-0145-FEDER 031447 and 031821, NORTE-01-0145-FEDER-000020, and PTDC-EEI-AUT-2933-2014|16858–TOCCATA

A decision support system for planning promotion time slots

We report on the development of a Decision Support System (DSS) to plan the best assignment for the weekly promotion space of a TV station. Each product to promote has a given target audience that is best reached at specific time periods during the week. The DSS aims to maximize the total viewing for each product within its target audience while fulfilling a set of constraints defined by the user. The purpose of this paper is to describe the development and successful implementation of a heuristic-based scheduling software system that has been developed for a major Portuguese TV station.Fundação para a Ciência e a Tecnologia (FCT)- FCT/POCI 2010/FEDER, Projecto POCTI/MAT/61842/2004Estação de Televisão SI

A genetic algorithm approach for the TV self-promotion assignment problem

We report on the development of a Genetic Algorithm (GA), which has been integrated into a Decision Support System to plan the best assignment of the weekly self-promotion space for a TV station. The problem addressed consists on deciding which shows to advertise and when such that the number of viewers, of an intended group or target, is maximized. The GA proposed incorporates a greedy heuristic to find good initial solutions. These solutions, as well as the solutions later obtained through the use of the GA, go then through a repair procedure. This is used with two objectives, which are addressed in turn. Firstly, it checks the solution feasibility and if unfeasible it is fixed by removing some shows. Secondly, it tries to improve the solution by adding some extra shows. Since the problem faced by the commercial TV station is too big and has too many features it cannot be solved exactly. Therefore, in order to test the quality of the solutions provided by the proposed GA we have randomly generated some smaller problem instances. For these problems we have obtained solutions on average within 1% of the optimal solution value

Optimal investment timing using Markov jump price processes

In this work, we address an investment problem where the investment can either be made immediately or postponed to a later time, in the hope that market conditions become more favourable. In our case, uncertainty is introduced through market price. When the investment is undertaken, a fixed sunk cost must be paid and a series of cash flows are to be received. Therefore, we are faced with an irreversible investment. Real options analysis provides an adequate framework for this type of problems by recognizing these two characteristics, uncertainty and irreversibility, explicitly. We describe algorithmic solutions for this type of problems by modelling market prices evolution by Markov jump processes.Irreversible investment, optimal stopping, dynamic programming, Markov jump processes

Analytical results for a Bessel function times Legendre polynomials class integrals

When treating problems of vector diffraction in electromagnetic theory, the evaluation of the integral involving Bessel and associated Legendre functions is necessary. Here we present the analytical result for this integral that will make unnecessary numerical quadrature techniques or localized approximations. The solution is presented using the properties of the Bessel and associated Legendre functions.Comment: 4 page

A line-binned treatment of opacities for the spectra and light curves from neutron star mergers

The electromagnetic observations of GW170817 were able to dramatically increase our understanding of neutron star mergers beyond what we learned from gravitational waves alone. These observations provided insight on all aspects of the merger from the nature of the gamma-ray burst to the characteristics of the ejected material. The ejecta of neutron star mergers are expected to produce such electromagnetic transients, called kilonovae or macronovae. Characteristics of the ejecta include large velocity gradients, relative to supernovae, and the presence of heavy $r$-process elements, which pose significant challenges to the accurate calculation of radiative opacities and radiation transport. For example, these opacities include a dense forest of bound-bound features arising from near-neutral lanthanide and actinide elements. Here we investigate the use of fine-structure, line-binned opacities that preserve the integral of the opacity over frequency. Advantages of this area-preserving approach over the traditional expansion-opacity formalism include the ability to pre-calculate opacity tables that are independent of the type of hydrodynamic expansion and that eliminate the computational expense of calculating opacities within radiation-transport simulations. Tabular opacities are generated for all 14 lanthanides as well as a representative actinide element, uranium. We demonstrate that spectral simulations produced with the line-binned opacities agree well with results produced with the more accurate continuous Monte Carlo Sobolev approach, as well as with the commonly used expansion-opacity formalism. Additional investigations illustrate the convergence of opacity with respect to the number of included lines, and elucidate sensitivities to different atomic physics approximations, such as fully and semi-relativistic approaches.Comment: 27 pages, 22 figures. arXiv admin note: text overlap with arXiv:1702.0299

On the degeneracy phenomenon for nonlinear optimal control problems with higher index state constraints

Relatório Técnico do Núcleo de Investigação Officina Mathematica.Necessary conditions of optimality (NCO) play an important role in optimization problems. They are the major tool to select a set of candidates to minimizers. In optimal control theory, the NCO appear in the form of a Maximum Principle (MP). For certain optimal control problems with state constraints, it might happen that the MP are unable to provide useful information --- the set of all admissible solutions coincides with the set of candidates that satisfy the MP. When this happens, the MP is said to degenerate. In the recent years, there has been some literature on fortified forms of the MP in such way that avoid degeneracy. These fortified forms involve additional hypotheses --- Constraint Qualifications. Whenever the state constraints have higher index (i.e. their first derivative with respect to time does not depend on control), the current constraint qualifications are not adequate. So, the main purpose here is fortify the maximum principle for optimal control problems with higher index constraints, for which there is a need to develop new constraint qualifications. The results presented here are a generalization to nonlinear problems of a previous work.The financial support from Projecto FCT POSC/EEA-SRI/61831/2004 is gratefully acknowledged