| Abstract: |
Property development activities often occur in stages, which are appropriately
modeled as sequential American exchange property options, where there are interim
expenditures required in order to keep the property development options "alive".
Normally American exchange options require a numerical solution, but herein there
is a new closed-form approximate solution, which is computationally efficient and
accurate. This method combines repeats of Margrabe European exchange and Geske
compound option solutions with tight upper boundaries of either American
perpetuities or European exchange options with a high volatility.
Illustrations are provided of the sensitivity of the real sequential options and optimal
timing to changes in several parameters, which provide a framework for property
policy (tax, subsidy and regulatory) guidelines and for property development strategy
evaluation. There are several plausible applications of these real option models in
commercial and residential property development, within commercial property
leases, with regard to switching tenants, and agricultural alternatives.
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