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A synthetic protective put strategy for phased investment in projects without an outright deferral

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journal contribution
posted on 2006-05-01, 00:00 authored by Sukanto BhattacharyaSukanto Bhattacharya
This paper proposes and computationally demonstrates a synthetic protective put strategy for real options. Specifically, it deals with the problem of deferral option when an outright deferral is not permissible owing to competitive pressures. It is demonstrated that, in such a situation, an appropriate strategy would be to invest in the new project in phases rather than doing it all at once. The replicating portfolio for a protective put on the project is obtained by setting the owner’s equity in the project equal to the price of a call option on the value of the project. This is a logical extension of the financial protective put to the real options scenario and is relatively simple and practicable for businesses to adopt and apply.

History

Journal

Derivatives: use, trading & regulation

Volume

12

Issue

1/2

Pagination

2 - 13

Publisher

Palgrave Macmillan

Location

Basingstoke, England

ISSN

1747-4426

eISSN

1357-0927

Language

eng

Publication classification

C1.1 Refereed article in a scholarly journal

Copyright notice

2006, Palgrave Macmillan

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