Exercising Real Options Sooner or Later? New Insights from Quantile-Preserving Spreads on how to Hasten or Delay Exercise
50 Pages Posted: 28 Sep 2021
Date Written: September 28, 2021
Using Quantile-Preserving Spreads and Stochastic Dominance, this paper studies how modifying a real option's characteristic affects the real option holding value and optimal exercise decision. We find that the direction of change in exercise probability and timing depends on the preserved quantile, strike price, time of underlying modification, and whether a modification is symmetric or not. We significantly generalize previously obtained results to an unspecified underlying process and a general call-like payoff function. Our propositions and corollaries apply to various real option and economic policy problems. Specifically, the results are useful to determine a modification of a real option to increase or decrease its exercise probability and timing.
Keywords: Real Option, Financial Option, Exercise Probability, Quantile-preserving Spread, Stochastic Dominance, Capital Investment
JEL Classification: G12, G31, G32
Suggested Citation: Suggested Citation