TY  - JOUR
AU  - Miltersen,Kristian R.
AU  - Schwartz,Eduardo S.
TI  - Real Options With Uncertain Maturity and Competition
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12990
PY  - 2007
Y2  - March 2007
UR  - http://www.nber.org/papers/w12990
L1  - http://www.nber.org/papers/w12990.pdf
N1  - Author contact info:
Kristian R. Miltersen
Department of Finance and Management Science
Helleveien 30
NO-5045 Bergen, NORWAY
E-Mail: kristian.r.miltersen@nhh.no

Eduardo S. Schwartz
Anderson Graduate School of Management
UCLA
110 Westwood Plaza
Los Angeles, CA  90095
Tel: 310/825-2873
Fax: 310/825-6384
E-Mail: eduardo.schwartz@anderson.ucla.edu
AB  - We develop a new approach to dealing with real options problems with uncertain maturity. This type of situation is typical for R&D investments and mine or oil exploration projects. These types of projects are characterized by significant on-going investment costs until completion. Since time to completion is uncertain, the total investment costs will also be uncertain. Despite the fact that these projects include complicated American abandonment/switching options until completion and European options at completion (because of fixed final investment costs) we obtain simple closed form solutions. We apply the framework to situations in which the owner of the project has monopoly rights to the outcome of the project, and to situations in which there are two owners who simultaneously invest, but where only one of them may obtain the rights to the outcome. We expand the real options framework to incorporate game theoretic considerations, including a generalization of mixed strategies to continuous-time models in the form of abandonment intensities.
ER  -