Model-based Estimation of Flexibility and Optionability in an Integrated Real Options Framework

Abstract

Uncertainties can be managed through real options that provide a decision maker the right, but not the obligation, to exercise actions at a later time. In previous work we introduced an integrated real options framework (IRF) that distinguishes among option mechanism and type. The mechanism is the enabler of the option, while the type refers to the flexibility provided by the option. The idea behind IRF is to use models of a system or enterprise as a coupled dependency structure matrix (C-DSM) in order to identify and value enablers and types of flexibility. In this paper, we first show how the distinction among mechanisms and types of options leads to the identification of some new ldquoilitiesrdquo, such as optionability, that are relevant to the options identification problem. Second, we show that the semantics of a traditional dependency model does not allow for the representation and estimation of flexibility and optionability. Therefore, we extend the C-DSM model to a logical C-DSM that is capable of representing logical relations among dependencies. Finally, we present metrics for estimating flexibility and optionability from the logical C-DSM model. We discuss the results of applying these metrics to identify mechanisms and options in purchasing a swarm of uninhabited air vehicles.