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System dynamics (GPS)
Real Options for Adaptive Decisions (ROADs)
Option pricing equation
Shadow price of time
Opportunity cost of retaining the option instead of selling it and putting the money in the bank
Value of an expected change in the gross margin
Risk adjusted capital gains from retaining the option
Gross margins with the obligation to continue
Gross margins with the option to exit
Payoff of the option to exit
Payoff of the option to enter
The calculation of option values, the location of thresholds and expected times at thresholds
Step 1. Solve the option pricing equation for all possible times and gross margins.
Step 2. Assume the gross margin is fixed and search for the largest option price for that particular gross margin. Make note of the expected time before the switch.
Step 3. Repeat step 2 for all possible gross margins and identify the gross margin where the largest option price is no longer greater than the terminal value.
Transition probabilities (TRIPs)
Cumulative probability distributions
Probabilities of crossing the entry threshold
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