Center-of-Gravity Real Options Method Based on Interval-Valued Fuzzy Numbers

Jani Kinnunen; Irina Georgescu; Mikael Collan

doi:10.1007/978-3-030-51156-2_151

Center-of-Gravity Real Options Method Based on Interval-Valued Fuzzy Numbers

Jani Kinnunen^*, Irina Georgescu, Mikael Collan

^*Corresponding author for this work

Research output: Chapter in Book/Conference proceeding › Conference contribution › Scientific › peer-review

4 Citations (Scopus)

Abstract

This paper introduces an extension to the center-of-gravity fuzzy pay-off method, CoG-FPOM by Borges and others from 2018 meant for the valuation of real options by using interval-valued fuzzy numbers. The CoG-FPOM was developed as a response and a remedy to the identified inconsistency with financial theory in the original fuzzy pay-off method for real option valuation (FPOM). The use of interval-valued fuzzy numbers introduced in this paper allows taking into account a higher level of uncertainty and imprecision than is possible with the original CoG-FPOM model. This higher level of uncertainty can be encountered in many application areas. The proposed approach builds on using triangular upper and lower membership functions of fuzzy numbers, which represent expected pay-off distributions. The applicability of the CoG-FPOM in high uncertainty situations is improved by allowing the use of ranges instead of single numbers when inputting values for scenarios. An illustrative numerical application is presented in the context of mergers and acquisitions, where an acquiring company may receive options to abandon that is, rights to divest non-core business units acquired together with the desired parts of a target company. The model outcomes will be discussed and compared with the results from other pay-off-based fuzzy real option valuation models including the original FPOM.

Original language	English
Title of host publication	Intelligent and Fuzzy Techniques
Subtitle of host publication	Smart and Innovative Solutions - Proceedings of the INFUS 2020 Conference
Editors	Cengiz Kahraman, Sezi Cevik Onar, Basar Oztaysi, Irem Ucal Sari, Selcuk Cebi, A. Cagri Tolga
Publisher	Springer
Pages	1292-1300
Number of pages	9
ISBN (Print)	9783030511555
DOIs	https://doi.org/10.1007/978-3-030-51156-2_151
Publication status	Published - 2021
MoE publication type	A4 Article in a conference publication
Event	International Conference on Intelligent and Fuzzy Systems, INFUS 2020 - Istanbul, Turkey Duration: 21 Jul 2020 → 23 Jul 2020

Publication series

Name	Advances in Intelligent Systems and Computing
Volume	1197 AISC
ISSN (Print)	2194-5357
ISSN (Electronic)	2194-5365

Conference

Conference	International Conference on Intelligent and Fuzzy Systems, INFUS 2020
Country/Territory	Turkey
City	Istanbul
Period	21/07/20 → 23/07/20

Keywords

Center of gravity
Fuzzy pay-off method
Interval-Valued fuzzy numbers
Mergers and acquisitions
Possibility theory
Real option

Access to Document

10.1007/978-3-030-51156-2_151

Cite this

Kinnunen, J., Georgescu, I., & Collan, M. (2021). Center-of-Gravity Real Options Method Based on Interval-Valued Fuzzy Numbers. In C. Kahraman, S. Cevik Onar, B. Oztaysi, I. U. Sari, S. Cebi, & A. C. Tolga (Eds.), Intelligent and Fuzzy Techniques: Smart and Innovative Solutions - Proceedings of the INFUS 2020 Conference (pp. 1292-1300). (Advances in Intelligent Systems and Computing; Vol. 1197 AISC). Springer. https://doi.org/10.1007/978-3-030-51156-2_151

Kinnunen, Jani ; Georgescu, Irina ; Collan, Mikael. / Center-of-Gravity Real Options Method Based on Interval-Valued Fuzzy Numbers. Intelligent and Fuzzy Techniques: Smart and Innovative Solutions - Proceedings of the INFUS 2020 Conference. editor / Cengiz Kahraman ; Sezi Cevik Onar ; Basar Oztaysi ; Irem Ucal Sari ; Selcuk Cebi ; A. Cagri Tolga. Springer, 2021. pp. 1292-1300 (Advances in Intelligent Systems and Computing).

@inproceedings{2735f42bc9864992b081b4304e14a9d7,

title = "Center-of-Gravity Real Options Method Based on Interval-Valued Fuzzy Numbers",

abstract = "This paper introduces an extension to the center-of-gravity fuzzy pay-off method, CoG-FPOM by Borges and others from 2018 meant for the valuation of real options by using interval-valued fuzzy numbers. The CoG-FPOM was developed as a response and a remedy to the identified inconsistency with financial theory in the original fuzzy pay-off method for real option valuation (FPOM). The use of interval-valued fuzzy numbers introduced in this paper allows taking into account a higher level of uncertainty and imprecision than is possible with the original CoG-FPOM model. This higher level of uncertainty can be encountered in many application areas. The proposed approach builds on using triangular upper and lower membership functions of fuzzy numbers, which represent expected pay-off distributions. The applicability of the CoG-FPOM in high uncertainty situations is improved by allowing the use of ranges instead of single numbers when inputting values for scenarios. An illustrative numerical application is presented in the context of mergers and acquisitions, where an acquiring company may receive options to abandon that is, rights to divest non-core business units acquired together with the desired parts of a target company. The model outcomes will be discussed and compared with the results from other pay-off-based fuzzy real option valuation models including the original FPOM.",

keywords = "Center of gravity, Fuzzy pay-off method, Interval-Valued fuzzy numbers, Mergers and acquisitions, Possibility theory, Real option",

author = "Jani Kinnunen and Irina Georgescu and Mikael Collan",

note = "Publisher Copyright: {\textcopyright} 2021, The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG.; International Conference on Intelligent and Fuzzy Systems, INFUS 2020 ; Conference date: 21-07-2020 Through 23-07-2020",

year = "2021",

doi = "10.1007/978-3-030-51156-2_151",

language = "English",

isbn = "9783030511555",

series = "Advances in Intelligent Systems and Computing",

publisher = "Springer",

pages = "1292--1300",

editor = "Cengiz Kahraman and {Cevik Onar}, Sezi and Basar Oztaysi and Sari, {Irem Ucal} and Selcuk Cebi and Tolga, {A. Cagri}",

booktitle = "Intelligent and Fuzzy Techniques",

}

Kinnunen, J, Georgescu, I & Collan, M 2021, Center-of-Gravity Real Options Method Based on Interval-Valued Fuzzy Numbers. in C Kahraman, S Cevik Onar, B Oztaysi, IU Sari, S Cebi & AC Tolga (eds), Intelligent and Fuzzy Techniques: Smart and Innovative Solutions - Proceedings of the INFUS 2020 Conference. Advances in Intelligent Systems and Computing, vol. 1197 AISC, Springer, pp. 1292-1300, International Conference on Intelligent and Fuzzy Systems, INFUS 2020, Istanbul, Turkey, 21/07/20. https://doi.org/10.1007/978-3-030-51156-2_151

Center-of-Gravity Real Options Method Based on Interval-Valued Fuzzy Numbers. / Kinnunen, Jani; Georgescu, Irina; Collan, Mikael.
Intelligent and Fuzzy Techniques: Smart and Innovative Solutions - Proceedings of the INFUS 2020 Conference. ed. / Cengiz Kahraman; Sezi Cevik Onar; Basar Oztaysi; Irem Ucal Sari; Selcuk Cebi; A. Cagri Tolga. Springer, 2021. p. 1292-1300 (Advances in Intelligent Systems and Computing; Vol. 1197 AISC).

Research output: Chapter in Book/Conference proceeding › Conference contribution › Scientific › peer-review

TY - GEN

T1 - Center-of-Gravity Real Options Method Based on Interval-Valued Fuzzy Numbers

AU - Kinnunen, Jani

AU - Georgescu, Irina

AU - Collan, Mikael

PY - 2021

Y1 - 2021

N2 - This paper introduces an extension to the center-of-gravity fuzzy pay-off method, CoG-FPOM by Borges and others from 2018 meant for the valuation of real options by using interval-valued fuzzy numbers. The CoG-FPOM was developed as a response and a remedy to the identified inconsistency with financial theory in the original fuzzy pay-off method for real option valuation (FPOM). The use of interval-valued fuzzy numbers introduced in this paper allows taking into account a higher level of uncertainty and imprecision than is possible with the original CoG-FPOM model. This higher level of uncertainty can be encountered in many application areas. The proposed approach builds on using triangular upper and lower membership functions of fuzzy numbers, which represent expected pay-off distributions. The applicability of the CoG-FPOM in high uncertainty situations is improved by allowing the use of ranges instead of single numbers when inputting values for scenarios. An illustrative numerical application is presented in the context of mergers and acquisitions, where an acquiring company may receive options to abandon that is, rights to divest non-core business units acquired together with the desired parts of a target company. The model outcomes will be discussed and compared with the results from other pay-off-based fuzzy real option valuation models including the original FPOM.

AB - This paper introduces an extension to the center-of-gravity fuzzy pay-off method, CoG-FPOM by Borges and others from 2018 meant for the valuation of real options by using interval-valued fuzzy numbers. The CoG-FPOM was developed as a response and a remedy to the identified inconsistency with financial theory in the original fuzzy pay-off method for real option valuation (FPOM). The use of interval-valued fuzzy numbers introduced in this paper allows taking into account a higher level of uncertainty and imprecision than is possible with the original CoG-FPOM model. This higher level of uncertainty can be encountered in many application areas. The proposed approach builds on using triangular upper and lower membership functions of fuzzy numbers, which represent expected pay-off distributions. The applicability of the CoG-FPOM in high uncertainty situations is improved by allowing the use of ranges instead of single numbers when inputting values for scenarios. An illustrative numerical application is presented in the context of mergers and acquisitions, where an acquiring company may receive options to abandon that is, rights to divest non-core business units acquired together with the desired parts of a target company. The model outcomes will be discussed and compared with the results from other pay-off-based fuzzy real option valuation models including the original FPOM.

KW - Center of gravity

KW - Fuzzy pay-off method

KW - Interval-Valued fuzzy numbers

KW - Mergers and acquisitions

KW - Possibility theory

KW - Real option

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U2 - 10.1007/978-3-030-51156-2_151

DO - 10.1007/978-3-030-51156-2_151

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SN - 9783030511555

T3 - Advances in Intelligent Systems and Computing

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EP - 1300

BT - Intelligent and Fuzzy Techniques

A2 - Kahraman, Cengiz

A2 - Cevik Onar, Sezi

A2 - Oztaysi, Basar

A2 - Sari, Irem Ucal

A2 - Cebi, Selcuk

A2 - Tolga, A. Cagri

PB - Springer

T2 - International Conference on Intelligent and Fuzzy Systems, INFUS 2020

Y2 - 21 July 2020 through 23 July 2020

ER -

Kinnunen J, Georgescu I, Collan M. Center-of-Gravity Real Options Method Based on Interval-Valued Fuzzy Numbers. In Kahraman C, Cevik Onar S, Oztaysi B, Sari IU, Cebi S, Tolga AC, editors, Intelligent and Fuzzy Techniques: Smart and Innovative Solutions - Proceedings of the INFUS 2020 Conference. Springer. 2021. p. 1292-1300. (Advances in Intelligent Systems and Computing). doi: 10.1007/978-3-030-51156-2_151

Center-of-Gravity Real Options Method Based on Interval-Valued Fuzzy Numbers

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Keywords

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