Investment timing in African private equity: A real options analysis

Abstract

This paper modifies the standard binomial option pricing approach to real options analysis so as to incorporate exogenous volatility. Real options allow a manager to gather information about a potential investment payoff prior to investment occurring . The focal point of this paper is to uncover the value that deferral options have in regard to investment decisions and to determine the optimal investment timing given macroeconomic conditions. The results show that enhanced value is yielded by deferral options in instances of higher exogenous volatility and that the most optimal investment outcomes are achievable when there is higher volatility which is proven by the complete elimination of downward movement investment loss.