Real Option Technology in Appliance Extended Warranty Valuation‪.‬

ABSTRACT Since the extended warranty can be expressed as a contingent insurance policy, in this study the extended warranty is valued as a put option. Real option technology is applied in order to determine if the observed extended warranty prices coincide with the theoretic extended warranty prices of three types of durable goods. Our findings suggest that the prices of the extended warranties should be negative. Because the premiums of these extended warranties do have positive values, it is, however, implied that other variables are involved that generate a positive premium price.