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Real options in service investments: scenarios from defence

Driouchi, Tarik; Pennesi, Paris; Kapletia, Dharm; Cuthbert, Rachel

Authors

Tarik Driouchi

Paris Pennesi

Dharm Kapletia

Rachel Cuthbert



Abstract

This paper addresses the theme of investment under uncertainty in services. We specifically apply principles of contingent-claims analysis to underline the value of flexibility, i.e., the real options, embedded in service level agreements (SLAs) and maintenance & repair investments in the context of aerospace and defence. We focus on path-dependent and complex contingent-claims, to show how the design of 'exotic' type options in service investments can provide valuable insurance policies against operational and financial risks for the customer, in addition to enhancing providers' incentives from superior service performance. For illustration, we highlight examples of barrier, lookback, compound, chooser and extendible options as flexibility clauses/alternatives for service provision in defence contracts.

Citation

Driouchi, T., Pennesi, P., Kapletia, D., & Cuthbert, R. (2009). Real options in service investments: scenarios from defence. International Journal of Services Sciences, 2(1), 1. https://doi.org/10.1504/ijssci.2009.021959

Journal Article Type Article
Publication Date 2009
Deposit Date May 27, 2020
Journal International Journal of Services Sciences
Print ISSN 1753-1446
Electronic ISSN 1753-1454
Publisher Inderscience
Peer Reviewed Peer Reviewed
Volume 2
Issue 1
Pages 1
DOI https://doi.org/10.1504/ijssci.2009.021959
Public URL https://uwe-repository.worktribe.com/output/5607250