Real-options-based planning strategies under uncertainty

In this work, a real-options-based valuation (ROV) framework for hedging under uncertainty is developed. The basic idea of the proposed ROV methodology is the recognition and utilization of external market opportunities to guide internal planning decisions of a company. This is achieved by applying key financial planning principles such as arbitrage-free pricing and risk-neutral valuation to real, nonfinancial resource allocation decisions under uncertainty. Three application areas of the ROV methodology are described: production planning, pharmaceutical pipeline management, and emission trading. Multistage stochastic programming is used to incorporate uncertainty and a quantitative comparison of the ROV approach, and the traditional net-present-value (NPV) approach is provided.