American Journal of Operations Research, 2011, 1, 16-23
doi: 10.4236/ajor.2011.11003 Published Online March 2011 (
Copyright © 2011 SciRes .AJOR
Analysis of Studies from 2000-2010 in Real Option Theory
and Application to OM
Hui-Chuan Chen
University of Texas at Arlington, US
Received February 20, 2011; revised March 21, 2011; accepted March 23, 2011
Traditional project investment methods, such as the discounted cash flow (DCF) with a fixed static plan, are
no longer sufficient to assist the corporate strategies of seizing opportunities and profitability. The option
pricing formula includes a theoretical framework for pricing financial options, assuming that the risk in a
financial hedged position is zero, if the option is adjusted continuously in a short position. Hence, the real
options revolution arose in response to the dissatisfaction of corporation practitioners with traditional capital
budgeting techniques, such as standard discount cash flow. This paper analyzes relevant articles from the
“Journal of Operations Management” and “Management Sciences” as related to real options theory in the
field of operations management. The goal of this study is to review and identify the gaps in application to
real option theory in their studies. Finally, this paper provides suggestions for future researc hers.
Keywords: Option Theory, Operations Management, Hedging, Flexibility
In today’s highly competitive business environment,
corporate managers must constantly make decisions in
resp onse to the rap idl y chan ging marke tpla ce s, inc lud ing
new product introductions, information systems, re-
search and development, as well as outso urcing of manu-
facturing. Co mpany strate gies must be flexible a nd agile
in order to seize the opportunities and profitability. If
managers can learn from their mistakes, and make ad-
justments to execute different options, companies can
more quickl y reach a hig her profit than t heir co mpetitors.
Yeo and Qiu [ 1] menti one d th at many o f the se mana gers
now recognize that the traditional project investment
methods, especially the discounted cash flow (DCF)
based measures are no longer sufficient in the current
rapidly changing environment. Traditionally, the DCF
method provides a fixed static plan and expects that fu-
ture plans will not be alter ed. However, this is no longer
a suitable method. This study will provide an overview
of real options theory and investigate the relevant litera-
ture to determine the gaps which occur when real options
are implemented in the operations management
field.Furthermore, this study will present some relevant
propositions and pertinent questions for managers in
decision making processes.
2. Overview of Conventional Real Options
Black and Scholes [2] published the option pricing for-
mula in 1973 with a theoretical framework for pricing
financial options; specifically, they provide the basic
assumption and equation that stock values follow a log-
normal distribution progress,
= +
where S is the price of the stock, μ is the drift rate of S, t
is a time in years, σ is the var iat i on of the stock’s returns,
and z is a Wiener process.Generally speaking, an option
provides the holder the right to purchase or sell a share
of stock at a specific price. The holders have the right to
purchase a stock when it is a “call” option, and they also
have the right to sell a stock when it is a “put” option.
An organized traded call options started in April 1973,
and in June 1977 the trading of put options followed [3].
An American option indicates that the option can be
exercised at any time before maturity or the expiration
date, whereas a European option can only be exercised
on the expiration date. One early pricing theory proposed
by Black and Scholes [2] states that at the maturity date
and under risk neutral conditions, the price of a Euro-
Copyright © 2011 SciRes .AJOR
pean call option has a closed solution. They assume that
the risk in the financial hedged position is zero if the
option is adjusted continuously in a short position; how-
ever, if the position i s not con stantl y modified, the risk is
minimal, and is comprised entirely of risk that can be
spread by shaping a portfolio of a great number of
hedged positions [2]. The mathematical analysis for fi-
nancial options through diversifying the risks has led to
Cox and Ross’ [4] risk neutral valuation model. They
applied a series of binomial trees or the Monte Carlo
method as option valuation techniques to represent fu-
ture asset values. Cox and Ross further state that inves-
tors can expect returns and discount rates in a “realistic”
risk free condition.They also pointed out that Black and
Scholes’ option pricing model relies only on observable
variables under a static setting, as opposed to Cox and
Ross’ option valuation model which focuses on “the
aggregate value of the claims against the returns of a
firm” [4]. However, the risk neutra l val uation may no t be
realis tic fo r the b usine ss en vir on ment u nder many unc er-
tainti es a nd changes.
3. New Directions for Real Options
Trigeorgis [5] indicated that the real options revolution
arose in response to the dissatisfaction of corporate prac-
titioners using traditio nal capital budgeting techniques,
such as standard discount cash flow. Yeo and Qiu [1]
point out that the real options applications assist manag-
ers to gain a broader perspective and opportunities rather
than a particular valuation. Thus, various investment
scenarios can be seen as groups of options. Furthermore,
the main difference between applying real option meth-
ods and financ ial options is t hat real optio ns are relevant
to real resources which are tangible, including machin-
ery, factory, etc. Conversely, a financial asset normally
includes stocks and bonds.
Some other distinctions between the financial options
theory a nd t he real optio ns i nvol ve financial opti ons hav-
ing a shorter life—such as less than one year of expira-
tion date, whereas real options can be long-lived. Addi-
tionally, financial options are fairly simple with a single
exercise price, but the exercise price for real options
differs from time to time. Yeo and Qiu [1] provide an
example that investing in research and development
(R&D) produces an option to implement a technology
with unknown benefits. If the investment is successful,
there is a succeeding option to increase the product line.
When the product is at the end of product stage, there is
the option to abandon it. Moreover, the market position
of the company may exercise the option to be influenced
by a series of options and optimal timing.Amram and
Kulatilaka [6] state that applying an options-based ap-
proach is not merely the use of a new method of valua-
tion equations and models. In fact, it involves a new ap-
proach of structuring strategic decisions. The managers
must consider a sequence of strategies such as potential
gains for the corporation by moving from position A to
position B. It is similar to a decision tress with various
options opening down to the decision paths.
Uncove ring eac h step throug h the rea l optio ns can be
difficult. Real options are different from the financial
options because real options are not specifically defined
or clearly packaged. However, the options are actually
present in many business decisions. Amram and Kulati-
laka [6] and Yeo & Qiu [1] indicate some of the hypo-
thetical examples of the most general types of real op-
tions: “Ti ming options, Growth options, Staging options,
Exit options, Flexibility options, Operating options, and
Learning options.”These common types of real options
assist the companies to increase the scale by enhancing
the upside potentials profits, without raising the down-
side of the risks. The next section will present some
relevant articles which discuss the application of real
options theory in the field of operatio ns management.
4. Literature Review of Real Options
Applications in Om
Journal of Operations Management and Management
Science are two well-established journals in the field of
operations management research. The following litera-
ture review presented in this paper will focus on the
relevance of real options applications within these two
journals as related to practicing real options in OM and
the applicatio n o f s imulation methods.
4.1. Application of Real Options in the OM
When corporations try to alleviate the risk, the real op-
tions can be demonstrated with financial and non-
financial hedging for risk management strategies. Boy-
abatlı and Toktay [7] indicate that real options are ap-
plied as operational hedging instruments. Much opera-
tional hedging has been demonstrated in a diversity of
fields such as finance, strategy, operations management,
and international business. Operational hedging com-
prises a major part of firm-level risk management deci-
sions which show that firms actually exercise operational
hedges in managing their risks. Specifically, Weiss and
Maher [8] discuss how fina nci al a nd op erat iona l hed ging
impacts the airline industry. After the events of Septem-
ber 11, 2001, airline industries realized the importance
of managing financial distress under undesirable condi-
tions and alleviating risk. Specifically, Weiss and
Maher’s research included nine U.S airlines with data
Copyright © 2011 SciRes .AJOR
covering 44 quarters from 1990 to 2000 examining the
impact of the firms’ performance under uncertainty on
operational hedging to financial hedging. The attributes
for operations hedging are represented by fleet diversifi-
cation, load factor, lease, and domestic and the attributes
for financial hedging are represented by fuel hedging,
cash, financial leverage. The results show that the air-
lines involved in operational hedging can better respond
to unfavorable events to reduce risks. Thus, in the case
of the a ir li ne i nd u stry, fi na ncial hed gi n g in str u me nt s ( i. e .,
fuel price protection) are not as powerful as operations
Amram and Kulatilaka [6] address the flexibility op-
tions when demand is uncertain for new products; how-
ever, forecasts imply that sales targets would be reached
acr oss two co ntine nts. T hus, t he manage rs sho uld d ecid e
whether to build a single plant in one continent or two
plants on two continents. The flexibility option will be
taken into account when the value of the option out-
weighs the costs saved by only building one plant. In
another study, Jack and Raturi [9] infer that volume
flexibility assists the handling of the aggregate demand
uncertainty. Volume flexibility allows the company to
change production upwards and downwards within
broad limits. However, the implementation of flexibility
in capabilities may not be easily exercised or accurately
measured. Therefore, modular product design permits
firms to buffer processes with a list of “modules” in
which the span of processes can be buffered resulted in
increasing demand uncertainties. Additionally, modular
product design and a list of “modules” improve the vol-
ume flexibility by generating options for the firm which
did not exist before. Their research applied the findings
into a survey of 140 valid business respondents to see
how each firm employs its resources to accomplish vol-
ume flexibilit y. The results indic ated that both small and
large firms depend on overtime source as a key short-
term option of volume flexibility; however, small firms
are more efficient at using inventory and capacity buff-
ers (short-term sources) of volume flexibility to react to
variations in demand while large firms are better stand
on taking competitive advantage through the long-term
sources (such as supply chain networks and outsourcing
arr ange ment s) of vo lume fle xi bili ty. T he find ing s fur ther
suggest that volume flexibility for short and long-term
sources has a positive impact on both delivery and finan-
cial performance.
da Silveria [10] describes the challenge for many op-
erations seeking flexibility without any negative effect
on expenditures, quality, delivery, or performance. The
flexibility model which included 285 manufacturers of
fabricated metal products, machinery, and equipment
from 14 countries revealed that flexibility competence
could be built by structuring simplicity and discipline in
manufacturing. da Silveria further stated that simplicity
without lowering the number of options offered to the
firm should de liver a ra tio nalize d process that is easier to
adapt and r econfigure to altering requ irements; likewise,
discipline, as opposed to “stiffening procedures and
skills,” will enable a firm to response to changes in the
marketplace, while promoting improved practices and
work processes. The results provided the flexibility im-
provements have a positive relationship between sim-
plicity and discipline in manufacturing. Especially, the
relationships were stronger in high volume processes
than in low volume processes.
Sawhney [11] applied flexibility simultaneously be-
tween the reactive and proactive approach to assist man-
agers with their daily operational decision making
among the supply chain systems. The reactive approach
is addressed when organizations deal with different types
of uncer ta i nt y whi ch e xt e nd fr o m the up a nd d o wn to t he
basic task within the firm. As for proactive approaches,
it has been argued that flexibility can be used proactively
to generate competitive advantages for a firm. Thus, the
area of flexibility is hierarchical, and it bi-directs from
up to downstream or vice-versa within a single firm.
Moreover, the flexibility under application of reactive
and proactive is in a sequential approach which provides
additional options for managers planning strategies
acro ss the supply chain to create value for the customers
and the firm.
Furthermore, Pagell and Krause [12] have considered
the relationship between uncertainty and flexibility, and
between flexibility and performance. However, their
study presented doubts regarding the earlier results.
Pagell and Krause replicated the model of Swamidass
and Newell [13] and focused on surveys but found no
relationship between increased uncertainty and increased
flexibility under cross-industry sample of manufacturing
firms. Additionally, there is little supporting evidence
when higher levels of flexibility in uncertain environ-
ments were associated with higher levels of performance.
Thus, it was suggested that a more thorough research
study should involve indust ry a nd business str ateg y.
Under mass customization, customers are highly in-
volved in specifying the product, whereas manufacturers
can produce high volumes of products. In other words,
customers can purchase a customized product without
sacrificing economies of scale from the cost of a mass
production item. Additionally, during mass customiza-
tion, the manufacturers must attend to each customer’s
specifications in product design. Duray et al. [14] rec-
ommende d that the manufacturers employ a modular
design to achieve manufacturing efficiencies to ap-
proximate the standardization of mass production. Their
Copyright © 2011 SciRes .AJOR
study found that utilizing the modularity in the later
phases of production may improve performance for mass
customizers. Moreover, the results showed that when
mass customizers approach mass production, profitable
scales of economy and better financial performance can
be achieved.
Dilts and Pence [15] studied whether the role of deci-
sion maker—project manager or executive sponsor—
would impact the termination a public sector project.
Different functional managers have different project
perceptions while an individual manager interprets the
projects differently; therefore, this will affect how the
managers’ decisions whether to continue or terminate the
projects. Moreover, other reasons to terminate the pro-
jects include how much effort and money the managers
have devoted, how rapid and uncertainty the external
environment changes, or how big or small the scale of
the projects are. Also, there are tendencies for individual
decision makers to add more resources (sunk costs) al-
ready consumed in a failed project. The final finding
from Dilts and Pence’s study indicated that two key fac-
tors have statistically significant difference between ex-
ecuti ve a nd pr oj ect mana ge rs. E xecut ive s thi nk tha t vari-
ance in overall project complexity and in time to com-
pletion are less significant than the project managers. In
other words, project managers (when compared to ex-
ecutives) have a higher tendency to terminate a project
which is running ove rtime.
Folta, Delmar, and Wennberg [16] applied the hybrid
entrepreneurship to study how individual’s decision to
opt for self-employment. They defined hybrid entrepre-
neur s as indi viduals who ta ke on self-employment while
holding a primary job in some other organization. The
authors described that the hybrid entrepreneurship is
most likely to experience the entrepreneurial waters be-
fore becoming fully immersed into self-employment.
Through this experience, individuals can learn the ven-
ture’s potential advantages whether the y ca n ada pt t o the
self-employment surroundings. When individuals are
less confident, this mode of entry might assist them to
limit their sunk costs while they collect evidence to bet-
ter understand the unknown capabilities. Furthermore, a
real optio n may be characterized under small-scale entry
with hybrid entrepreneurship to invest heavily when
early returns are showing and to retire if they are not.
This situation can also be explained by determining
when the switching or opportunity costs are high; the
individual might delay being fully self-employed. Re-
search has shown that the hybrids often leave wage work
and j oin se lf-empl oyme nt wh en ther e is a p osit ive si gnal
about performance prospects; however, the hybrids may
leave their self-employment while there is a negative
signa l. O the r wi se , i nd ivi d ua ls mi ght s ta y i n h ybr id sta t us
until there is a clear signal. This leads to the conclusion
dra wn that h ybrid entrepr e neurship is attracti ve due to its
avoidance ofswitching costs such as losing retirement
benefits, healthcare, or seniority status to maintain the
flexibility and o ption value related to delay entrepreneu-
rial access. The next section will provide some simula-
tion designs that may occur under real options applica-
4.2. Simulation Method Applications in OM
Managers are often concerned about making tough deci-
sions that require choosing among various competing
designs within the firms’ manufacturing, supply chain,
or service delivery system. Simulations can be a part of
methods to assist the managers for determining alterna-
tive designs. However, the time needed to do the simula-
tion or which given simulation results to implement is
anothe r i mpor tant d ecis io n for t he mana gers . T hus, if the
goal is to choose the high-level system design with
maximize expected net present value (NPV), the man-
ager may encounter more simulations to decrease the
uncertainty or delay in project implementation by apply-
ing more simulations. Ranking and selection procedures
which provide a preferred level of statistical evidence in
best performance are one of the frequent approaches for
selecting a finite set of simulated systems. Additionally,
Chic k and Gan s [17] stated that the ra nki ng and s election
methods atte mpt to minimize the mean number of simu-
lations necessary to achieve a preferred level of statisti-
cal evidence for appropriate selection. However, it was
emphasized that the statistical significance might not be
the same as financial significance; therefore, when simu-
lation results and system performance are used as finan-
cial measures, the maximization of expected NPV can be
a more appropriate objective. The simulations are based
on managers having prior confidence regarding the dis-
tribution of the NPV of these. Eventually, the authors
designed their study to respond to the issue under simu-
lation with financial measures such as marginal cost un-
der optimization controlto a pply operatio nal d e c isions.
Gamba and Fusair [18] stated that real options theory
presents an ordinary framework to achieve value crea-
tion fr o m modula r de sig n. Furthe r mor e, the y e xp la i n tha t
the modularization process is a detailed description
which can be defined by a number of parameters and
their associations. Additionally, they point out that a
module is determined by a group of strongly intercon-
nected factors that are typically independent from the
factors of other modules. Similarly, Baldwin and Clark
[19] indicated that module design is to exhibit modular-
ity in design under a complex system. If the modulari-
tyseg ments ca n be co nstruc ted indepe ndentl y, the desi gn
Copyright © 2011 SciRes .AJOR
Table 1. Literature review sum ma r y
Journal Author(s) Va lid Data Topic Results
JOM Weiss & Maher
(2009) 11 US Airlines Operational vs. financial
hedging Operational hedging vehicles are more powerful in
protecting firms than using financial instruments.
JOM Sawhney (2006) 64 Printed Circuit
board plants Flexibility vs. reactive and
Flexibility under application of reactive and proac-
tive is in a sequential approach which provides
addit ional options across the supply chain.
JOM de Silvei ra
(2006) 285 manufacturers
from 14 countries Flexibilit y vs. sim plicity &
Flexibility improvements have a positive relation-
ship between simplicity and discipline in manufac-
JOM Dilts &Pence
55 worked for N a-
tional Institute of
Just ic e public projects
Executives & Project man-
agers’ role in termination
Proj ect mana g ers ar e more li kely to terminate a
project that i s running overtime than are executives.
JOM Pagell & Kra use
252 members of the
Insti tute of Supp ly
Man agement (ISM)
Flexi bility vs. un certain &
The result s sh o w that there is no evidence t o sup-
port higher levels of flexibility in uncertain envi-
ronments when associated with higher levels of
JOM Jack& Raturi
(2002) Three ca se st udi es &
140 survey Volume Flexibility & Per-
Volume flexibility for short and long-term options
has a pos itive impact on both delivery a nd financial
JOM Duray et al.
(2000) 194 manuf. Plants Mass Customization &
Modula r Des ign
When mass customizers approach mass production,
th ey c an reach econom ies of scale and better finan-
cial per formance ite ms .
MS Folta, Delmar &
Wennberg (2010) 45,000 Swedish men Hybrid entrepreneurship vs.
complete immersio n in self-
Hybrid ent ry is preferred to self-employment entry
with more capable, lower s witc hin g co sts , and l ess
self-employment experience.
MS Chick and Gans
(2009) Simulation Max. NPV vs. Min. replica-
It links financial measure to optimal control of
simulation experiments that are designed to inform
operat ional decision s.
MS Gamba & Fusari
(2009) Simulation Valuing Modularity vs. r eal
option Based on modularization in the design of a system
for capital budgeting decisions.
MS Kumar &
Turnbull (2008) None Optimal pat enting & li cens-
ing of financial innovati ons
A parsi m onious framework is devel oped to assist
the managers whether to patent under consideration
for a financ ial ins titution.
will interconnect to support the whole. Furthermore,
Gamba and Fusair considered six operators (splitting,
substitution, augmenting, excluding, inversion, and port-
ing) which can be defined as options were chosen to
describe the evolution from a nonmodular design to a
modular design. Thus, there i s a need to link modularity
and real option theory to practice. In addition, Gamba
and Fusair combined Baldwin and Clark’s six modular
operators to implement the simulations with each opera-
tor. Thus, the purpose for these operators is intended to
create value, while the natural valuation application de-
pends on claim analysis employed to optional investment
decisionswhich comprisere a l options theory.
Financial institutions, which are also applicable for
real options, often develop different types of innovations
in financial services and products. In order to protect
these i nnovatio ns, financial managers have the option to
decide whether to obtain patents, patents and licensing,
or none at all. Kumar and Turnbull [20] mentioned that
witho ut such mea sures, the innovating institutio n has no
legal right to see k a judgme nt if there is imitation. T her e-
fore, while larger financial firms generally patent, nonfi-
nancial institutions file for more patents compared to
financial firms. Please see Table 1.Literature Review
5. Identifying the Gaps in the Literature &
Based on the literature review above, this section identi-
Copyright © 2011 SciRes .AJOR
fies the lack of rea l world applicatio ns for option theor y.
Weiss and Maher [8] clearly applied real options (hedg-
ing) to understand how airlines manage to alleviate the
risk.However, while many firms incorporate flexibility
into their strategic planning, the studies do not specifi-
cally apply real options theory into the research. For
example, both Jack and Raturi [9] and da Silveria [10]
used flexibility for their research on volume productions.
However, they did not consider whether building flexi-
bility increases the overall corporation value. Thus, these
studies could have included Mello, P arsons, and Triantis
[21]’s flexibility study in sourcing its production to
hedge exchange rate risk in financial markets. The de-
gree of flexibilit y for pro duction is directly link with the
firm’s financial policy. Therefore, the following proposi-
tions are established:
Proposition 1. Higher degree of production flexibil-
ity is positively related to a firm’s willingness to
hedge its financial assets.
For example, Sawhney [11] studied options for both
suppliers and customers’ flexibility to reduce the manu-
facturing uncertainty. He provided a transformation
framework of flexibility for his model. Also, he dis-
cusses how flexibility assists the companies to reduce
costs. Nevertheless, the manner in which these different
flexibilities af fect the financial i mpact of the firms is no t
addressed. Pagell and Krause [12] studied the flexibility
and firms’ performance, and they tried to evaluate the
flexibility with some financial impact such as growth in
sales and returns for the firms. However, they did not
find a significant rela tionship bet ween the flexibility and
performance. Duray et al. [14] utilized mass customiza-
tion with modular design to achieve high performance.
Since a positive relationship between mass customiza-
tion and financial performance was observed, I contend
Proposition 2. The higher the mass customization
utilized in the firm, the more likely it is to build
stronger flexibility in the firm and its financial per-
Many research studies have presented different op-
tions and provide simulations to investigate which option
can offer the highest value for the corporations. These
options and simulations are usually predetermined by the
managers who make the final decision, resulting in the
highe st val ue o f s i mula t io n. Thu s, t he se o pt io ns a re quite
difficult to utilize in real world examples. For example,
Boyabatlı and Toktay [7] provided some real options
among operational flexibility. The firms have options
whether or not to engage in a multinational investment
by obtaining a level of profits. As real options apply to
manage the risk of inventories related to uncertain de-
mand, retailers and manufacturers often arrange reorder-
ing contracts, o r call options which per mit the retailer to
purchase additional merchandise at a pre-decided time
for a fixed price and return contracts, or put options
which let the retailer to return unsold products at a pre-
determined salvage value [22]. According to Pandza et
al. [23], by delaying investments through waiting for
market and technology uncertainty to diminish, the real
options logic can iden tify the value availab le to firms b y
waiting before proceeding into a larger commitment.
Proposition 3. Higher uncertainty in market and
technology will delay firms’ decisions to proceed
with additional in vestment.
Overall, the above analysis reveals that the gaps be-
tween real world applications and utilizes real options
practices to assist managers in deciding the companies’
future strategic planning. The propositions facilitate
some direction for managers when utilizing option the-
6. Implications and Future Research
From the above discus sion, it is evident that a fundamen-
tal gap exists between utilizing real option and simula-
tion in real world scenarios. Since it is important for
managers to simulate some options before applying the
flexibility model, the risk of the uncertainty when the
firms invest in any future projects can be alleviated.
Several of the articles cited above for flexibility applica-
tions such as da Silveria [10], Sawhney [11], Jack and
Raturi [9], Pagell and Krause [12], and Duray et al. [14],
and with Gamba and Fusari’s [18] for simulation under
modularity valuing can be expanded to establish some
research questions and models. Due to the above re-
search implementation of slightly different flexibility
approaches, this section of the present study focuses on
Sawhney’s [11] article regarding some questions that
could be extended when applying real options under
certain simulations.
In Table 2, the author studied the upstream (supplier
flexibility) and downstream (customer flexibility) and
the relationship between input, process, and output flexi-
bility. While not a dd ressing a ny val ues to help the fir ms’
generate higher revenue, Sawhney indicates that flexibil-
ity will impact the suppliers and customers’ flexibility.
Therefore, the managers can ask: Which flexibility op-
tion can assist the firm to generate the most value
through implementation of those decisions? By imple-
menting the flexibility option in each stage, does the
firm create incremental value by taking advantage of
theupside potential profits? Sawhney specified sixteen
propositions for his research; in this study, it is proposed
Copyright © 2011 SciRes .AJOR
Table 2. Sawhney (2006) transformation framework of flexibility.
that this research could be modified b y using each of his
propositions as an option to determine whether to im-
plement or delay the actions under consideration.
Since Black and Scholes’ [2] original option pricing
formula was proposed in 1973 to Cox and Ross’ [4] risk
neutral valuation model, options have been applied from
the financial field to various business areas. Corpora-
tions have utilized options to help firms alleviate the
uncertainty and risk, thereby allowing them to increase
value and profits. Many researchers have published re-
lated topics in applying flexibility and real options in
some of the research. Specifically, JOM includes several
articles related to flexibility for their studies and MS
focuses on how to implement real options in simulation
form. Due to the challenges of institutionalizing the
process to connect the real option theory in actual sce-
narios, few articles have been published on the applica-
tion side. This review defines the gaps, proposes propo-
sitions, and builds on Sawhney’s study to arrive at some
research questions for the real option decision within a
flexibility approach. It is hoped that this proposal can
assist managers to make better decisions in generating
corporate profits while dealing with the uncertainty and
avoidin g risk.
6. Referen ces
[1] Yeo, K.T. & Qiu, F. (2003). The value of management
flexibility - a real option approach to investment evalua-
tion. International Journal of Project Management, 21,
[2] Black, F. & Scholes, M. (1973). The Pricing of Options
and Corporate Liabilities. The Journal of Political Econ-
omy, 81(3), 637-654.doi:10.1086/260062
[3] Merton, R.C., Scholes, M.S., & Gladstein, M.L. (1982).
The Returns and Risks of Alternative Put-Option Portfo-
lio Investment Strategies. Journal of Business,55(1), 1-55.
[4] Cox, J.C. & Ross, S.A. (1976). The Valuation of Options
for Alternat ive Stochastic Processes . Journal of Financial
Economics , 3, 14 5-166.
[5] Trigeorgis, L. (1993). Real Options and Interactions with
Financial Flexibility. Financial Management, 22(3), 202-
[6] Amram, M. & Kulatilaka, N. (1999). Disciplined deci-
sions: aligning strategy with the financial markets. Har-
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