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Project management under risk: using the real options approach to evaluate flexibility in RandD

Author: Huchzermeier, Arnd ; Loch, Christoph H.INSEAD Area: Technology and Operations Management Series: Working Paper ; 98/56/TM Publisher: Fontainebleau : INSEAD, 1998.Language: EnglishDescription: 31 p.Type of document: INSEAD Working Paper Online Access: Click here Abstract: The real options framework has been proposed to understand the value of managerial flexibility in the context of uncertain RandD projects because it can capture asymmetric upside potentials. This article develops a model bridging the gap between financial uncertainty as considered in options pricing theory, and operational uncertainty encountered as stochastic variability in RandD operations. We identify five example types of operational variability in market payoffs, project budgets, quality perfromance, market requirements and project schedules
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The real options framework has been proposed to understand the value of managerial flexibility in the context of uncertain RandD projects because it can capture asymmetric upside potentials. This article develops a model bridging the gap between financial uncertainty as considered in options pricing theory, and operational uncertainty encountered as stochastic variability in RandD operations. We identify five example types of operational variability in market payoffs, project budgets, quality perfromance, market requirements and project schedules

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