Fuzzy Valuation in Real Options Analysis

Abstract

In real option pricing, it is impractical to assume the net present value of expected cash flow payoff as an exact number because it is a forecasted vague one. The net present value can defined a fuzzy number to express its estimated uncertain values and the Black-Scholes formula is used to price a real option. A modified pricing approach to real options is thus proposed to transform the forecasted uncertain values evaluated by experts into some normal fuzzy numbers. The distance between fuzzy variables are introduced to construct weighted vectors. It is verified rational to estimate the net present value of expected cash flow payoff with a normal fuzzy number is. A numerical example is given to illustrate the validity of the proposed approach .