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The combined effect of both of "uncertainty" and "managerial flexibility" may generate an asymmetric payoff condition called "contingent claim" where the project's revenue drastically shift and the fact one of the most popular capital budgeting theories, the NPV (Net Present Value) analysis, is limited to assess the value change caused by these asymmetric payoffs makes people seek alternations to resolve this issue.
This theory is based on the assumption that the stock price follows an uncertain diffusion process of a log-normal distribution called a 'Geometric Brownian Motio' proven to appropriately model the price of an asymmetric payoff of financial securities (Luenberger, 1998).
Firstly, the MRG agreement can be considered to be formulated as a repeatedly exercisable put option based on the asymmetric payoff condition in Equation (7).
The asymmetric payoff generated from the RCP agreement during the concession is as below.
So, Equation (30) is the final form of the asymmetric payoff in the MRC compound option.
It is worth reemphasizing that our definition of asymmetry does not correspond precisely with skewness, or any particular group of moments of the asymmetric payoff distribution.
Such a contract would, of course, have a highly asymmetric payoff distribution.
This transformation is flexible for describing option-like and other asymmetric payoffs based on a symmetrically distributed underlying variable.
P]) describes the negatively asymmetric payoffs of a typical insurance contract--occasional large negative outcomes offset by far more frequent small positive outcomes.
It is often argued that much of the standard valuation models in finance are poorly suited for incorporating the pricing of asymmetric payoffs.
These asymmetric payoff effects can be accentuated by shifts in parameters that do not alter the Nash predictions.
It's an asymmetric payoff to the negative side, we feel, and it just isn't worth taking on the huge integration risks for just a little bit of upside.
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