Real Options Valuation Under Uncertainty

42 Pages Posted: 20 Aug 2015

See all articles by Marie Lambert

Marie Lambert

University of Liege - HEC Management School

Manuel Moreno

University of Castilla-La Mancha

Federico Platania

University of Liege; Ecole Superieure d'Ingenierie Leonard de Vinci (ESILV); Ecole de Management Léonard De Vinci

Date Written: August 19, 2015

Abstract

In this paper we develop a novel valuation model and methodology to value a pharmaceutical R&D project based on real options approach. The real options approach enables the possibility of optimally abandon the project before completion whenever the investment cost turns out to be larger than the expected net cash flow stream. On the other hand, the proposed model accounts for two different sources of uncertainty, those are technical and economic risk. This model incorporates a novel economic state vector where each economic state captures the interaction among different market and economic forces using Fourier series as the particular basis for the economic function space. In this sense, Fourier series are considered as an aggregate of forces playing a relevant role in the process evolution determining the cash flow structure and also allowing us to properly define an economic scenario where the project will be developed.

Keywords: Real options, R&D, Economic risk, Fourier series, Pharmaceutical industry, Risk factor

JEL Classification: G12, G17, G32, C22, C63

Suggested Citation

Lambert, Marie and Moreno Fuentes, Manuel and Platania, Federico, Real Options Valuation Under Uncertainty (August 19, 2015). Available at SSRN: https://ssrn.com/abstract=2647293 or http://dx.doi.org/10.2139/ssrn.2647293

Marie Lambert

University of Liege - HEC Management School ( email )

HEC-Liège
rue Louvrex 14
LIEGE, Liege 4000
Belgium

Manuel Moreno Fuentes

University of Castilla-La Mancha ( email )

Cobertizo San Pedro Martir s/n
Toledo, Toledo 45071
Spain

Federico Platania (Contact Author)

University of Liege ( email )

B-4000 Liege
Belgium

Ecole Superieure d'Ingenierie Leonard de Vinci (ESILV) ( email )

92916 Paris La Defense Cedex
France

Ecole de Management Léonard De Vinci ( email )

Paris

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