Such options are known as flexible production options

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Unformatted text preview: bandonment options can usually be evaluated using the binominal method. Examples of abandonment options: - Airlines routinely close routes where the demand is insufficient to make the connection profitable. Natural resource companies 10.4 Flexible production option Firms often have an option to vary inputs to the production or change the output from production. Such options are known as flexible production options. Flexible production options are in particular valuable within industries where the lead time (time between an order and delivery) can extend for years. Examples of flexible production options: - In agriculture, a beef producer will value the option to switch between various feed sources to use the cheapest alternative. Airlines and shipping lines can switch capacity from one route to another. 10.5 Practical problems in valuing real options Option pricing models can help to value the real options in capital investment decisions, but when we price options we rely on the trick, where we constr...
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This note was uploaded on 10/26/2012 for the course 19 19 taught by Professor - during the Spring '12 term at Sunway University College.

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