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Hard coal project valuation based on real options approach: multiplicative vs. arithmetic stochastic process

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  • Saługa Piotr W.

    (Professor, AGH University of Science and Technology, Department of Energy Management, Faculty of Management, Krakow, Poland)

  • Kamiński Jacek

    (Professor, Mineral & Energy Economy Research Institute, Polish Academy of Sciences, Department of Policy and Strategic Research, Division of Energy Economics, Kraków, Poland)

Abstract

Precise valuation of the economic efficiency of risky investment projects in the mineral sector has a direct impact on the range of future investments. Since the mid-90s, a number of enterprises have also been giving increased attention to the valuation of managerial flexibility that cannot normally be estimated with classical discounted cash flow (DCF) analysis. This has been the result of a development in the real options analysis (ROA) and the simplification of its algorithms, most of which have been achieved through: ♦ incorporating lattice models,♦ introducing a single uncertain project parameter (gross present value, PV) as an underlying instrument,♦ assuming that the underlying asset follows the multiplicative stochastic process,♦ introducing the ‘marketed asset disclaimer’ (MAD) assumption.

Suggested Citation

  • Saługa Piotr W. & Kamiński Jacek, 2016. "Hard coal project valuation based on real options approach: multiplicative vs. arithmetic stochastic process," Gospodarka Surowcami Mineralnymi / Mineral Resources Management, Sciendo, vol. 32(1), pages 25-40, March.
    • Handle: RePEc:vrs:gosmin:v:32:y:2016:i:1:p:25-40:n:6
    DOI: 10.1515/gospo-2016-0006
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    References listed on IDEAS

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