I received a few comments on part 1 of this article. Thanks to Paddy and Fehrzard for their comments. This article is an attempt to make the first one more complete.
1. First, the disclaimer - Black Scholes assumes efficient markets as well as liquidity of the asset. Both may be challenged and rightly so.
2. Now, one very interesting thought on how to view patent is how to define it? It may be as a product or a service that can be developed as a result of the patent - this was the primary assumption in the earlier article.
However, the patent is also something that gives exclusivity to the innovation, not the innovation itself. Hence more pertinent is the value of 'exclusivity', or even the benefit from suing the competitor who infringes the patent.
3. The time to expiry is minimum of patent expiry or time for technology obsolescence.
4. A big assumption in my first article is the knowledge of investments needed in developing marketable products from the patents. Obviously, this is a difficult thing to predict. One can go by historical stats but that too is no guarantee to future. Only thing we can do is scenario analysis.
5. Finally, the opportunity cost of delaying the project also needs to be adjusted in the calculations.
Tailpiece - Nortel has now put on block the Carrier Division - Software minus the patents. More info on All About Nortel.