Journal of Applied Mathematics and Decision Sciences
Volume 2009 (2009), Article ID 817137, 16 pages
doi:10.1155/2009/817137
Research Article

Fuzzy Real Options in Brownfield Redevelopment Evaluation

Qian Wang,1 Keith W. Hipel,1 and D. Marc Kilgour2

1Department of Systems Design Engineering, University of Waterloo, Waterloo, ON, N2L 3G1, Canada
2Department of Mathematics, Wilfrid Laurier University, Waterloo, ON, N2L 3C5, Canada

Received 22 December 2008; Accepted 22 March 2009

Academic Editor: Lean Yu

Copyright © 2009 Qian Wang et al. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

Real options modeling, which extends the ability of option pricing models to evaluate real assets, can be used to evaluate risky projects because of its capacity to handle uncertainties. This research utilizes possibility theory to represent private risks of a project, which are not reflected in the market and hence are not fully evaluated by standard option pricing models. Using a transformation method, these private risks can be represented as fuzzy variables and then priced with a fuzzy real options model. This principle is demonstrated by valuing a brownfield redevelopment project using a prototype decision support system based on fuzzy real options. Because they generalize the original model and enable it to deal with additional uncertainties, fuzzy real options are entirely suitable for the evaluation of such projects.