Valuation of the minimum revenue guarantee and the option to abandon in BOT infrastructure projects

Yu-Lin Huang*, Shih Pei Chou

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

91 Scopus citations

Abstract

The real option approach is used to value the minimum revenue guarantee (MRG) and the option to abandon in Build-Operate-Transfer infrastructure projects. The option to abandon is formulated under an investment option held by the concessionaire at contract signing and to expire before construction commencement. MRG is formulated as a series of European style put options in a single option pricing model. When combined with the option to abandon in the pre-construction phase, MRG is reconstructed as a series of European style call options to develop a compound option pricing formula. The Taiwan High-Speed Rail Project is chosen as a numerical case to apply the formulas. The results show both MRG and the option to abandon can create values. When MRG and the option to abandon are combined, they will counteract each other and their values will thus be reduced. Increasing the MRG level will decrease the value of the option to abandon, and, at a certain MRG level, the option to abandon will be rendered worthless.

Original languageEnglish
Pages (from-to)379-389
Number of pages11
JournalConstruction Management and Economics
Volume24
Issue number4
DOIs
StatePublished - 1 Apr 2006

Keywords

  • BOT
  • Infrastructure
  • Minimum revenue guarantee
  • Option to abandon
  • Real option

Fingerprint Dive into the research topics of 'Valuation of the minimum revenue guarantee and the option to abandon in BOT infrastructure projects'. Together they form a unique fingerprint.

Cite this