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This paper proposes a discrete time real options model with time‐dependent and serial correlated return process for a real estate development problem with waiting options. Based on a Martingale condition, the paper claims to be able to relax many unrealistic assumptions made in the typical real option pricing methodology. Our real option model is a new one without assuming the return process as “Ito Process”, specifically, without assuming a geometric Brownian motion. We apply the model to the condominium market in Tokyo metropolitan area in the period 1971‐1997 and estimate the value of waiting to invest in 1998‐2007. The results partly provide realistic estimates of the parameters and show the applicability of our model.

This survey explores the application of real options theory to the field of health economics. The integration of options theory offers a valuable framework to address these challenges, providing insights into healthcare investments, policy analysis and patient care pathways.

This research employs the real options theory, a financial concept, to delve into health economics challenges. Through a systematic approach, three distinct models rooted in this theory are crafted and analyzed. Firstly, the study examines the value of investing in emerging health technology, factoring in future advantages, associated costs and unpredictability. The second model is patient-centric, evaluating the choice between immediate treatment switch and waiting for more clarity, while also weighing the associated risks. Lastly, the research assesses pandemic-related government policies, emphasizing the importance of delaying decisions in the face of uncertainties, thereby promoting data-driven policymaking.

Three different real options models are presented in this study to illustrate their applicability and value in aiding decision-makers. (1) The first evaluates investments in new technology, analyzing future benefits, discount rates and benefit volatility to determine investment value. (2) In the second model, a patient has the option of switching treatments now or waiting for more information before optimally switching treatments. However, waiting has its risks, such as disease progression. By modeling the potential benefits and risks of both options, and factoring in the time value, this model aids doctors and patients in making informed decisions based on a quantified assessment of potential outcomes. (3) The third model concerns pandemic policy: governments can end or prolong lockdowns. While awaiting more data on the virus might lead to economic and societal strain, the model emphasizes the economic value of deferring decisions under uncertainty.

This research provides a quantified perspective on various decisions in healthcare, from investments in new technology to treatment choices for patients to government decisions regarding pandemics. By applying real options theory, stakeholders can make more evidence-driven decisions.

Decisions about patient care pathways and pandemic policies have direct societal implications. For instance, choices regarding the prolongation or ending of lockdowns can lead to economic and societal strain.

The originality of this study lies in its application of real options theory, a concept from finance, to the realm of health economics, offering novel insights and analytical tools for decision-makers in the healthcare sector.

It is fundamental to good governance that corporate decision makers be well informed, have the knowledge-base necessary to use the information effectively, and share the same motivations as the owners. Further, managers must provide owners with accurate, timely, and complete disclosure of the company's positions. Regarding the first part of the problem, value-based incentive systems have been under development in order to aid in resolving conflicts of interest between owners who lack the specific information (or the background knowledge to utilize it) and the managers who act as their agents. Such systems often focus exclusively upon cash flows relative to resource investment; yet, share values are often substantially greater than the amount that could be explained by expected cash flows from existing operations. Indeed, in some firms the majority of share value may derive from growth opportunities or other real options that add flexibility or reduce risk. So, value-based incentive systems could be improved by explicitly rewarding actions that create or enhance the firm's real options. Further, satisfactory disclosure requires that accounting reports include adequate information about the firm's real options, with market-based mechanisms for defining the necessary information and calling it into the appropriate arena.

This study analyses the determinants of the value of a portfolio of real options and explores implications for strategic management. It focuses the analysis on four elements: the number of real options in the portfolio, constraints on the number of options that can be exercised, the volatility of underlying assets, and the correlation between underlying assets. These elements are articulated around a trade-off between growth options and switching options and are applied to different strategic situations of technological, market, and macroeconomic uncertainty.

The continuous need for change in corporate real estate spaces warrants consideration of flexibility in new space design. To help decision makers invest more effectively in physical infrastructure and its ability to evolve, a formal method of identifying and valuing flexibility is developed. A model, based on real options techniques for valuing managerial flexibility, is constructed to answer the following question: how much is it worth to invest in a space that could be renovated to office space for a specified renovation cost in the future? Decision makers can use the option valuation results to determine whether the initial design and construction costs to achieve flexibility are justifiable. The transparent model is intended to be accessible to design teams in practice. It is an improvement on net present value and first‐cost based decision‐making techniques in that it explicitly accounts for uncertainty and for the ability of managers to make a rational future decision (between renting and renovating). The model considers three sources of uncertainty: the market price of rent for office space (as measured by volatility); date of space need; and amount of space need. Input values and/or probability distributions are needed for these variables. The model is constructed using a binomial lattice technique and Monte Carlo simulation. Results are given in a format that allows for comparison with cost estimates of physical architectural designs. For example, in a case study where current five‐year office‐space leases are estimated at US$98 per square foot and 0.39 annual volatility and the mean amount of space needed in the future is 50 per cent of the total, the real options valuation suggests that it is worth up to US$40 per square foot in initial investment expenses to achieve a space that could be renovated to office space for US$25 per square foot within the next eight years. The concept of addressing risk through ‘flexible design’ and analysing the value of flexibility is pertinent to judicious management of any new building project that is subject to uncertain future conditions.

Regarding the immense real estate divestitures that have taken place over the last couple of years, some stakeholders have begun to wonder if these short‐term activities may affect the long‐term competitive advantage of a company. While it appears reasonable that property divestitures enhance the financial situation of a company from a so‐called owner perspective, there is no equivalent quantitative evaluation for the loss in space utilisation and flexibility from a user perspective. Consequently, real estate decision making is based upon an insufficient information basis and is dominated by the investment perspective. In order to better align corporate real estate and real estate investment functions better, this paper introduces a formal decision model which describes the situation of corporate real estate decision makers. They have to trade off entrepreneurial flexibility gained by real estate holdings against the financial opportunity cost of freeing up capital. Making use of a prototype decision situation, the paper demonstrates how the decision maker can improve the underlying information basis for property divestment decisions, using a real option approach. Hence, real estate decisions gain in two respects: they are more transparent and, more importantly, their design is more suitable if the company wants to employ real estate holdings to increase the overall value of the company.

The purpose of this chapter is to discuss the potential contribution of the option applications to economic instability. To this end, the chapter briefly reviews the extant literature on financial option pricing and its applications to corporate assets and liabilities. It focuses on the direct relationship between the volatility of the underlying asset and the value of the option. It shows that the theory of option applications by its one-sided emphasis on the value-creating role of volatility promotes excessive risk-taking. Then the chapter discusses how the theory of option applications through the educational system encourages economic agents to make excessively risky decisions. Furthermore, the interactions among these risk-welcoming agents lead to an economic system which becomes increasingly risky. This risky economy, combined with the fact that more than half of the value of the option applications is constituted by the highly volatile value of the options embedded in such applications, translates into wide variations in real investments and the economy.

The flexibility of managers to respond to risk and uncertainty inherent in business decisions is clearly of value. This value has historically been recognized in an ad hoc manner in the absence of a methodology for more rigorous assessment of value. The application of real option methodology represents a more objective mechanism that allows managers to hedge against adverse effects and exploit upside potential. Of particular interest to managers in the merger and acquisition (M&A) process is the value of such flexibility related to the particular terms of a transaction. Typically, stock for stock transactions take more time to complete as compared to cash given the time lapse between announcement and completion. Over this period, if stock prices are volatile, stock for stock exchanges may result in adverse selection through the dilution of shareholder wealth of an acquiring firm or a target firm.

The paper develops a real option collar model that may be employed by managers to measure the market price risk involved to their shareholders in offering or accepting stock. We further discuss accounting issues related to this contingency pricing effect. Using an acquisition example from U.S. banking industry we illustrate how the collar arrangement may be used to hedge market price risk through flexibility to renegotiate the deal by exercising managerial options.

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.

The aim of this paper is to discuss intellectual capital (IC) from a valuation perspective and examine the nature of such capital and why traditional valuation methods fail to reflect the unique characteristics of IC and propose an alternative approach that captures them.

The paper builds on the existing literature in the fields of financial valuation and IC. The analysis of these fields allows us to combine them and discuss the possible usage and limitations of real option models for the assessment of intellectual capital in firms.

A valuation perspective is developed based on the real option models that have been extended from their origin in financial asset valuation to the valuation of firms' growth opportunities. Intellectual resources embody these opportunities contributing to both their evolution over time and their realisation in future. A typology of IC is developed based on the influence upon the various valuation parameters of real options. This approach provides a richer framework to analyse the relationship between IC and corporate value.

Clarification of the relationship between IC and managerial flexibility as a source of value will help managers understand how they can create and leverage such flexibility to create value. The paper enables managers to understand how different types of IC impact on risk taking, timing of investment projects and the value of speculative investments.

The paper clarifies the nature of IC in the way it contributes to managerial flexibility to gain competitive advantage and exploit growth opportunities. It extends the real options valuation framework to the valuation of intellectual assets thus providing a link among intellectual assets, business strategy and firm value.