Building Options at Project Front-End Strategizing: The Power of Capital Design for Evolvability

APPENDIX D

Estimating Volatility from Historical Data

The volatility in the number of days of road closure is calculated in the same way the volatility of a stock price can be empirically obtained by observing fixed intervals of time (Hull, 2009). Based on the records from the environment agency, Table 1 shows the number of days of road closure from 1988 to 2002 and the associated total costs (C_t) as a function of road closure.

The yearly return (u_i) is calculated by:

The volatility is given by:

From equation 2 and 15 observations (n), the ...