Corporate Investment Choice and Exchange Option between Production Functions

This paper examines the strategy in resource allocation of a firm which must choose between several production functions. These latter ones can differ by their respective initial investment amounts, input costs, output levels and prices...Such management problem is often posed when input values increase significantly, as for example energy and commodity prices. We determine the values of exchange options when we have to evaluate all the "Profits and Losses" (P&L) depending on the different production models, to take account of potential switches between projects during the management period. We provide a general valuation formula of the exchange options associated to these P&L by using a family of switching options.