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Real Options Conference 2024

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Competitive Real Option Portfolio Risk In A Duopoly

We evaluate the risk aspects of a simple portfolio of real options to invest for a duopoly. After summarizing the basic model, covering three sequences, two thresholds, and three strategic and rival options, we look at five risk elements: delta, vega, rho (the conventional option Greeks) along with epsilon (drift) and alpha (market share). The value function of both the leader and follower is most sensitive to revenue (delta), interest rate (rho), drift (epsilon) and market share (alpha) variations, which we view in terms of sensitivities (to percentage changes), partial derivatives (analytical confirmed by numerical) and to a range of each of the input variables. Naturally, delta and rho hedging are plausible and appropriate risk avoidance actions. Maintaining final stage market share is particularly important for the follower.

Dean Paxson
University of Manchester
United Kingdom

Roger Adkins
University of Manchester
United Kingdom

Alcino Azevedo
University of Aston
United Kingdom


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