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Valuing managerial flexibility: an application of real option valuation in time of economic transition

Valuing managerial flexibility: an application of real option valuation in time of economic... The purpose of the paper is to present a real option valuation (ROV) model that will help to measure the value of managerial flexibility. The value of managerial flexibility appears to play a pivotal role nowadays, given the transition nature of Latvian economy. There are few academic works on the topic, yet none of the major companies in the Latvia have publicised ROV application. We have carried out ROV based on Scenario Planning and Strategic Alternatives. Having combined Scenario planning with Monte Carlo simulation and Risk-Neutral Probability-based ROV with alternative strategies of Company, authors provided a solution to the company's problem at hand. Thereby we have identified value maximising decisions regarding the Business Unit of the Latvian Company. The flow chart of ROV application has been created which would be a useful `road map' for Latvian practitioners in time of economic transition. Keywords: real option analysis; Monte Carlo simulation; risk neutral probability-based analysis. Reference to this paper should be made as follows: Cirjevskis, A. and Baduns, E. (2015) `Valuing managerial flexibility: an application of real option valuation in time of economic transition', Int. J. Computational Economics and Econometrics, Vol. 5, No. 2, pp.143­163. Biographical notes: Andrejs Cirjevskis received http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Journal of Computational Economics and Econometrics Inderscience Publishers

Valuing managerial flexibility: an application of real option valuation in time of economic transition

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References (9)

Publisher
Inderscience Publishers
Copyright
Copyright © Inderscience Publishers
ISSN
1757-1170
eISSN
1757-1189
DOI
10.1504/IJCEE.2015.068675
Publisher site
See Article on Publisher Site

Abstract

The purpose of the paper is to present a real option valuation (ROV) model that will help to measure the value of managerial flexibility. The value of managerial flexibility appears to play a pivotal role nowadays, given the transition nature of Latvian economy. There are few academic works on the topic, yet none of the major companies in the Latvia have publicised ROV application. We have carried out ROV based on Scenario Planning and Strategic Alternatives. Having combined Scenario planning with Monte Carlo simulation and Risk-Neutral Probability-based ROV with alternative strategies of Company, authors provided a solution to the company's problem at hand. Thereby we have identified value maximising decisions regarding the Business Unit of the Latvian Company. The flow chart of ROV application has been created which would be a useful `road map' for Latvian practitioners in time of economic transition. Keywords: real option analysis; Monte Carlo simulation; risk neutral probability-based analysis. Reference to this paper should be made as follows: Cirjevskis, A. and Baduns, E. (2015) `Valuing managerial flexibility: an application of real option valuation in time of economic transition', Int. J. Computational Economics and Econometrics, Vol. 5, No. 2, pp.143­163. Biographical notes: Andrejs Cirjevskis received

Journal

International Journal of Computational Economics and EconometricsInderscience Publishers

Published: Jan 1, 2015

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