Optimizing location among n-countries under exchange rate uncertainty: applying real options

This study considers the effects of one real exchange rate on strategies that govern locations of production by firms that are entering N – 1 foreign countries. The batch process production model of Un and Wu which considers two locations of production, one in each of two countries, is extended to develop a decision valuation model to choose the two optimal locations to produce a good – one in each country. This extended model applies the real options approach (ROA) to determine the value of locating production in N countries. Moreover, a closed-form solution to the Continuous-Time Model Optimization Problem is derived. The optimal entry threshold value of a firm from country-0 to country-(N – 1) is calculated; a sensitivity analysis is performed, and some characteristic strategies of the operating method for the Constant Elasticity of Substitution (CES) batch process model among N countries are determined. Next, we can get optimal entry threshold value for Cobb–Douglas, perfect substitution and Leontief by CES production function. A useful summary of insights is provided for global managers.