Real options as a tool to hedge technological convergence risks in the american ethanol industry: a preliminary investigation

Resumo

Real options, which derivate from the concept of financial options, is an emerging technique to evaluate investment under uncertainty. Given that financial options are applied to financial assets risk management, it is reasonable to assume that real options could be a useful tool to manage operational risks. However, real options approach is mostly applied to evaluate investment. The majority of Ethanol producers in the United States produce such product based on corn. Nevertheless, other competing technologies are available such as sugar-cane and cellulosic. Thus, there is a technological convergence risk is this industry. This paper main goal is to provide an initial introduction of real options as a tool to manage technological convergence risk. The American ethanol industry is the baseline case to develop such hypothesis.