• number of years after which the sign of the overall project profitability
ceases to be a stochastic variable (i.e. years to expiry), denoted by YtE
The model outcomes (option pricing, optimal timing, optimal policy) are homogeneous
of degree zero with respect to NPV and UI. This allows to establish the optimality of
investments on the basis of the profitability of a single NGN connection. The VOL variable
measures the standard deviation of the natural logarithm of projects returns (i.e. ratio of
NPV at tn to NPV at tn-1). The PO variable is expressed as percentage of NPV.
In order to define the VOL parameter, i.e. the NPV annualized volatility, we need to rely
on the existence of a NGN pure player which is traded on an exchange market. We have
decided base our calibration on Citéfibre, a small scale fibre-to-the home Parisian operator.
Citéfibre was established in October 2004 and it was floated on the EuroNext Paris
exchange on the 2nd December 2005. After the signature of an agreement with the
Municipality of Paris in the beginning of 2005, Citéfibre began the actual fibre rollout in
the second half of 200523.
In our simulations the initial phase of the project life, the one surrounded by uncertainty,
is assumed to last for six years. The parameters of the model can be separated in two
categories: general inputs and operators’ idiosyncratic inputs. The risk-free rate and years
to expiry are both general inputs to the model, while the remaining parameters depend on
the characteristics of the specific NGN investment plan (either new entrant’s or established
operator’s).
23 On 20 october 2006 when Iliad announced the acquisition of CitéFibre, the FttH operator had more than
500 clients, 3,000 kilometres of optical fibres and 130 buildings with optical fibre cabling (representing some
4,000 households potentially connected to the network) in the 15th arrondissement of Paris. At that time
Citéfibre already held authorisations allowing it to connect another 4,000 households. See: An overview of
FiberDirk van der Woude Program manager FttH & broadband services City of Amsterdam August 15th ,
2007 edition.
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