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Rev Fin 1993; 6:825-850
© 1993 the Society for Financial Studies

Article

Equilibrium and options on real assets

JT Williams
Faculty of Commerce and Business Administration, University of British Columbia, 2053 Main Mail, Vancouver, V6T 1Z2, Canada

Abstract

In aggregate, options on real and financial assets can have very different properties. Typically, the good or service produced by a real asset has a finite elasticity of demand, and developers have finite capacities. Also, the supply of options can be limited, and developers can be less than perfectly competitive. In a subgame, perfect Nash equilibrium with these properties, the optimal exercise policy, and resulting values of developed and undeveloped assets are calculated explicitly. The novel comparative statics are discussed in detail.


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