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Getting real with real options

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  • M. R Grasselli

Abstract

We apply a utility-based method to obtain the value of a finite-time investment opportunity when the underlying real asset is not perfectly correlated to a traded financial asset. Using a discrete-time algorithm to calculate the indifference price for this type of real option, we present numerical examples for the corresponding investment thresholds, in particular highlighting their dependence with respect to correlation and risk aversion.

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  • M. R Grasselli, 2006. "Getting real with real options," Papers math/0604302, arXiv.org.
    • Handle: RePEc:arx:papers:math/0604302
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    References listed on IDEAS

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    1. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    2. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(4), pages 707-727.
    3. Julien Hugonnier & Erwan Morellec, 2004. "Investment under Uncertainty and Incomplete Markets," FAME Research Paper Series rp122, International Center for Financial Asset Management and Engineering.
    4. M. R. Grasselli, 2005. "Nonlinearity, correlation and the valuation of employee stock options," Papers math/0511234, arXiv.org.
    5. Henderson, Vicky & Hobson, David G., 2002. "Real options with constant relative risk aversion," Journal of Economic Dynamics and Control, Elsevier, vol. 27(2), pages 329-355, December.
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