Risk-hedging using options for upgrading investments in mobile networks

In this paper, we illustrate how a mobile network operator can plan an upgrading investment to anticipate explosions of the traffic demand, taking into account the expected generated profit and the customers satisfaction. The former parameter grows with the demand, whereas the latter sinks if the demand is too high as individual Quality of Service (QoS) may collapse due to capacity saturation problems. In addition to that, as the equipment price decreases with time, it may be interesting to wait rather than to invest at once. Taking into account this trade off, we propose a real option strategy to hedge against the risk that the investment has to take place earlier than expected. At last, we price this option with a backward dynamic programming approach, using recent improvements based on least-squares estimations.