Abstract:

In view of the actual situation that it was impractical to assume the present values of expected cash flow payoff and expected costs as exact numbers in real option pricing, a new pricing approach to the real option based on interval analysis and the cloud model was proposed after elaborate analysis of current pricing approaches to the real option based on fuzzy sets theory and emlploying the cloud model. Firstl, a new algorithm of the backward normal cloud integrating interval analysis theory was proposed on the inspiration of the algorithm of the backward cloud proposed based on cloud X information. Second, by expressing the present values of expected cash flow payoff and expected costs with generated cloud models, integrating option pricing theory and the new algorithm of backward cloud based on interval number and using cloud operation, a new pricing approach to real option was proposed to transform the intervals evaluated by experts into normal clouds and to estimate the volatility of expected cash flow payoff based on the backward normal cloud. A numerical example was given to illustrate the validity of the proposed approach.
 

Key words: interval analysis; normal cloud model; real option; expected cash flow payoff; B-S formula