Possibilistic fuzzy pay-off method for real option valuation with application to research and development investment analysis

This paper presents the first fully possibilistic method for real option valuation of investment projects, a new possibilistic variant of the fuzzy pay-off method for real option valuation. The new variant is derived by using the Luukka-Stoklasa-Collan transformation and is proven to be consistent with financial theory. The new variant is comparatively analyzed with the original method and the previously presented probabilistic variant. Fast computation formulae for the new variant in all use-cases in the triangular context are presented and complete fast computation formulae also for the previously presented probabilistic variant of the method are presented for the first time. The use of the new variant is illustrated with a set of numerical examples including examples of Research and Development investment analysis. (C) 2020 Elsevier B.V. All rights reserved.

Automated summary

This paper presents a new possibilistic method for real option valuation, derived using a transformation and proven to be consistent with financial theory. It is compared with the original method and a previously presented probabilistic variant, with fast computation formulae provided for the new variant in all use-cases. The new method is illustrated with numerical examples, including Research and Development investment analysis.