Journal of Korean Institute of Industrial Engineers (대한산업공학회지)

Korean Institute of Industrial Engineers (대한산업공학회)
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A Real Options Approach to Testing the Validity of Contribution to the Budget of the United States Forces Korea

실물옵션에 기반한 한·미국방예산 분담금 적정성 검정

  • Received : 2015.02.17
  • Accepted : 2015.05.11
  • Published : 2015.06.15
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Abstract

Due to the latest agreement between the military authorities of the Republic of Korea (ROK) and the United States (US) of America, Korea's annual contribution to the budget of the United States Forces Korea (USFK) rose as high as close to 1 trillion won. This seemingly prohibitive amount has led to the questioning of military critics regarding determination criteria, wholesomeness of cost, alignment of incentives, and implementational transparency, etc. As these sources of mistrust can potentially undermine the congruence of alliance, we attempt to devise a scientific means to test the validity of Korea's budget contribution. Specifically, we use the real options approach (ROA) to estimating the interval of the fair prices of maintaining the USFK. We consider the USFK as an insurance against foreign incursions, and this enables us to assume their role as a put option. Upon a hypothetical war breakout, the daily cumulative size of the Korean economy is estimated by implementing the simulated loss ratios of assets and population. As a result, the strategic value (put premium) of the USFK is exponentially higher the sooner the US forces are augmented following an intrusion. Also, Korea's payments toward the USFK in 2011 and 2012 appear theoretically fairly valued.

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