Journal of Real Options and Strategy
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Volume 4 , Issue 1
Showing 1-7 articles out of 7 articles from the selected issue
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Academic
  • Yuya Kawachi, Junichi Imai
    Volume 4 (2011) Issue 1 Pages 1-32
    Released: March 07, 2011
    JOURNALS FREE ACCESS
    This paper analyzes the optimum form of royalty structures between sales-based royalties (SBR) and margin-based royalties (MBR) in franchise business. A choice of the royalty structure obviously affects expected revenues for both franchisors and franchisees. We mainly investigate the effect of a franchisee's option to claim refunds under demand uncertainty. Given the royalty structure, on the one hand, the franchisee chooses the order quantity of goods to maximize the franchisee's expected profit. On the other hand the franchisor, which anticipates the franchisee's decision, can determine a transfer price of the goods to maximize the franchisor's profit. In this paper we formalize this relation as an optimization problem and analyze the solution. Our analysis reveals that (i) franchisors should choose the MBR in the presence of the demand uncertainty, (ii) the existence of the option to claim refunds has a non-negative impact on the franchisee's profit, especially when the volatility of the demand is high. We also conduct sensitivity analyses to examine the effect of each parameter on the expected profits for franchisors.
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  • Jing-Hui Dong, Yoshio Iihara
    Volume 4 (2011) Issue 1 Pages 33-46
    Released: March 07, 2011
    JOURNALS FREE ACCESS
    Replacement investment decision under uncertain maintenance and operation cost is discussed in several recent papers, in which uncertainty is described using geometric Brownian motion. In order to take sudden increasing of maintenance and operation cost caused by unpredictable accidents and disasters into consideration, in this paper we concern to use jump diffusion process with n positive jumps. Occurrence of each jump is assumed driven by a Poisson process. Size of jumps are random variables, the probability distribution is assumed to be exponential distribution and Erlang distribution. We derive equations for solving the optimal level of maintenance and operation cost for replacement, and show explicit formulas for expected present value of total cost and expected replacement period. For the purpose of considering the situations that maintenance and operation cost increase discretely, we use a pure jump process that the geometric Brownian motion part is eliminated from the jump diffusion process. In this case, we find that the smooth pasting condition is not contained in the equations for solving the optimal level for replacement. Numerical results show that unpredictable events increase the optimal level for replacement and total cost, but decrease expected replacement period. We also examine the effects of probability distributions of jump size.
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Practice
  • Junichiro Oda, Ryuta Takashima
    Volume 4 (2011) Issue 1 Pages 47-60
    Released: March 07, 2011
    JOURNALS FREE ACCESS
    In this study we focus on power generation replacement and CCS investment as a substitute for an aged coal-fired power plant under an emission trading system. In this analysis carbon price, gas price and free allocation are explicitly uncertain. Using a real options approach we evaluate the thresholds between “waiting” and “investment right now”. The results indicate that it requires substantially higher carbon price for early CCS diffusions. For example, in the case of middle-range gas price (around US$8/GJ), US$65/tCO2 is not sufficiency to invest CCS right now. In addition allocation uncertainty makes it more difficult to diffuse CCS in an early stage.
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  • Naoya Miyaguchi, Makoto Goto, Takahiro Ohno
    Volume 4 (2011) Issue 1 Pages 61-76
    Released: March 07, 2011
    JOURNALS FREE ACCESS
    The two-part tariff is adopted not only to many contracts for electricity supply but also to those for capacity trading. Previously, the fixed charge in the two-part tariff was thought to cover a part of fixed costs, but now it is getting considered to be a premium for the capacity reservation as the deregulation of the power industry progresses. The two-part tariff which appropriately reflects demand risk is expected to ensure the adequacy of power supply. In this paper, we construct a valuation model for the two-part tariff under power demand uncertainty with considering technology mix which is a set of generators with various fixed cost and variable cost. Further, some new perspectives are provided.
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  • Atsushi Kato
    Volume 4 (2011) Issue 1 Pages 77-100
    Released: March 07, 2011
    JOURNALS FREE ACCESS
    The software offshore outsourcings to China are very popular among Japanese firms. Chinese software firms are confronted with many risks including RMB appreciation risk, wage upward risk, technical risk, etc. The research question is, “What is the best strategy for Chinese software firms to deal with uncertainty in the future?” The paper defined four operation modes: Offshore Downstream, Offshore SI, Domestic market Downstream and Domestic market SI. We examined the merits and demerits of each operation modes and switching costs. Through numerical examples and Monte Carlo simulations, the researcher confirmed as follows; (1) To be going concern firms, Chinese offshore companies “must” have switching options between Japanese and Chinese markets, (2) The Offshore SI modes with switching options are superior to the Offshore Domestic mode with switching options.
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  • Makoto Kohama, Tsuyoshi Adachi, Chiharu Tokoro
    Volume 4 (2011) Issue 1 Pages 101-116
    Released: March 07, 2011
    JOURNALS FREE ACCESS
    Deep-sea minerals extraction has been attracted as domestic resources of Japan from the viewpoint of resources security. This study investigates feasibility evaluation with uncertainties for deep-sea mineral resources development project using real option analysis. Resources development has a lot of unique uncertainties. We propose multi-investments (compound option) model considering volatility of metal prices and ore deposit scale. Results from this model imply high option value at a case study of Sunrise ore deposit in Japanese EEZ, and show marginal investment prices and marginal cost to abandon the project by comparative statics. Furthermore, considering historical trend of metal prices, different types of stochastic process i.e. mean reverting process and geometric brownian motion are compared.
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  • Mikael Collan, Jani Kinnunen
    Volume 4 (2011) Issue 1 Pages 117-141
    Released: March 07, 2011
    JOURNALS FREE ACCESS
    Pre-acquisition target screening is a task that often needs to be made fast, but is still complex, especially due to the need to estimate the value of possible synergies arising from an acquisition. Acquisition synergies are highly uncertain, difficult to explicitly quantify, and require successful management actions to be realized. The valuation of synergies calls for methods that can handle both, high uncertainty and inexact information. This paper discusses how a rapid pre-acquisition screening of target companies can be performed with the pay-off method for real option valuation, treating the acquisition synergy as a real option available for the acquirer. The pay-off method is a simple, intuitive, and practitioner friendly method. We define acquisition synergy as the value arising from resource redeployments within the newly formed entity of the target and the acquirer, and as the value gained through the possible divesture of target company assets. The procedure presented can be used in the screening of prospective acquisition target companies.
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