Option Valuation of Claims on Real Assets: The Case of Offshore Petroleum Leases
AbstractThis paper extends financial option theory by developing a methodology for the valuation of claims on a real asset: an offsho re petroleum lease. Several theoretical and practical problems, not p resent in applying option pricing theory to financial assets, are add ressed. Most importantly, the authors show the necessity of combining option pricing techniques with a model of equilibrium in the market for the underlying asset (petroleum reserves). The advantages of this approach over conventional discounted cash flow techniques are empha sized. The methodological development provides important insights for both company behavior and government policy. Promising empirical res ults are reported. Copyright 1988, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
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Bibliographic InfoArticle provided by MIT Press in its journal Quarterly Journal of Economics.
Volume (Year): 103 (1988)
Issue (Month): 3 (August)
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