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Extending the real options approach by including information options

Signs that Markets are Coming Back

ISBN: 978-1-78350-931-7, eISBN: 978-1-78350-918-8

ISSN: 0196-3821

Publication date: 27 June 2014

Abstract

Analysis of Information Options offers new tools for evaluating investments in research, mineral exploration, logistics, energy transmission, and other information operations. With Information Options, the underlying assets are information assets and the rules governing exercise are based on the realities of the information realm (infosphere). Information Options can be modeled as options to “purchase” information assets by paying the cost of the information operations involved. Information Options arise at several stages of value creation. The initial stage involves observation of physical phenomena with accompanying data capture. The next refinement is to organize the data into structured databases. Then bits of information are selected from storage and synthesized into an information product (such as a management report). Next, the information product is presented to the user via an efficient interface that does not require the user to be a field expert. Information Options are similar in concept to real options but substantially different in their details, since real options have physical objects as the underlying assets and the rules governing exercise are based on the realities of the physical world. Also, while exercising a financial option typically kills the option, Information Options may include multiple exercises. Information Options may involve high volatility or jump processes as well, further enhancing their value. This chapter extends several important real option applications into the information realm, including jump process models and models for valuing options to synthesize any of n information items into any of m output assets.

Keywords

Acknowledgements

Acknowledgments

We gratefully acknowledge the many helpful comments from Lenos Trigeorgis and Gordon Sick. The author appreciates Phelim Boyle’s updated, electronic algorithm supplied from the working paper version of Boyle/Tse (1990); and the updated, electronic version of the multivariate normal subroutine MULNOR supplied by Mark Schervish.

Citation

Chen, A.H., Conover, J.A. and Kensinger, J.W. (2014), "Extending the real options approach by including information options", Signs that Markets are Coming Back (Research in Finance, Vol. 30), Emerald Group Publishing Limited, Bingley, pp. 53-93. https://doi.org/10.1108/S0196-382120140000030007

Publisher

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Emerald Group Publishing Limited

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