Practical guide to real options in discrete time
AbstractContinuous time models in the theory of real options give explicit formulas for optimal exercise strategies when options are simple and the price of an underlying asset follows a geometric Brownian motion. This paper suggests a general, computationally simple approach to real options in discrete time. Explicit formulas are derived even for embedded options. Discrete time processes reflect the scarcity of observations in the data, and may account for fat tails and skewness of probability distributions of commodity prices. The method of the paper is based on the use of the expected present value operators.
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Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 137.
Date of creation: 11 Aug 2004
Date of revision:
Real options; embedded options; expected present value operators;
Other versions of this item:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-07-26 (All new papers)
- NEP-CMP-2004-07-26 (Computational Economics)
- NEP-RMG-2004-07-26 (Risk Management)
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