Project Valuation Based on American Exchange Real Option

For some high-risk projects, the specific investment time cannot be decided in advance and the amount of cost（or salvage value）can be unknown at first. The managerial flexibility in such projects can be valued by American exchange option. In this paper, we developed Least Squares Monte-Carlo（LSM）and apply it to an empirical study, in which we discussed the American exchange value embedded in a managerial flexibility of defer investment. The empirical results indicate that the value of wait（option to defer）can be very large, which tends to be undervalued employing the traditional NPV approach. The results also reveal that the LSM is powerful and efficient in American exchange option valuation, and it is readily applicable in path-dependent and multifactor simulations where finite difference and binominal techniques cannot be used.