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A Simulation Approach To The Valuation Of Capital Budgeting Projects Incorporating A Defer Option

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  • Jorge Guardiola

    ()
    (Universidad Cardenal Herrera)

  • Antonio Falcó

    (Universidad Cardenal Herrera)

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    Abstract

    Techniques applied to determine the value of derivatives have been recently exported in the field of investment valuation. This paper aims to provide some light to the use of a new technique in the investment valuation literature, aiming to take into account the value of flexibility. This technique, designed by Longstaff and Schwartz, combines Monte Carlo simulation and the Ordinary Least Squares in order to value American-style derivatives with different specifications. We show that this method can easily be incorporated to value capital budgeting projects in the framework of the real options theory and provides coherent results from an economic point of view. We do this by estimating the value of several cases of an investment project that incorporates an option to defer the initial investment or layout through time. We estimate these values by using the Ox programming language. Algunas técnicas aplicadas para determinar el valor de derivados han sidorecientemente exportadas en el campo de la valoración de inversiones. Este trabajo tienecomo objetivo clarificar el uso de una nueva técnica dentro de la literatura de valoraciónde inversiones, teniendo en cuenta el valor de flexibilidad. Esta técnica, diseñada porLongstaff y Schwartz, combina la simulación de Monte Carlo y los Mínimos CuadradosOrdinarios con el objetivo de valorar derivados de tipo americano con distintasespecificaciones. En este trabajo demostramos que este método puede ser fácilmenteincorporado para valorar proyectos de inversión en el marco de la teoría de opcionesreales y muestra resultados coherentes desde el punto de vista económico. Lo hacemosestimando el valor de distintos casos de un proyecto de inversión que incorpora unaopción de posponer la inversión inicial en el tiempo. Estimamos estos valores usando ellenguaje de programación Ox.

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    File URL: http://www.ivie.es/downloads/docs/wpasec/wpasec-2004-22.pdf
    File Function: Fisrt version / Primera version, 2004
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    Bibliographic Info

    Paper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie EC with number 2004-22.

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    Length: 16 pages
    Date of creation: Nov 2004
    Date of revision:
    Publication status: Published by Ivie
    Handle: RePEc:ivi:wpasec:2004-22

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    Related research

    Keywords: Least Squares Monte Carlo; opción de espera; movimiento geométrico Browniano; proyecto de inversión. Least Squares Monte Carlo; defer option; geometric Brownian motion; investment project.;

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    1. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
    2. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
    3. Boyle, Phelim P., 1977. "Options: A Monte Carlo approach," Journal of Financial Economics, Elsevier, vol. 4(3), pages 323-338, May.
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