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Evaluating natural resource projects with embedded options and limited reserves

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  • Chung-Gee Lin
  • Yu-Shan Wang

Abstract

This study proposes a Dynamic Option Simulation (DOS) approach to evaluate natural resource investment projects that contain several embedded options and limited reserves. To construct a practical pricing model, DOS combines simulation and dynamic programming techniques that can value natural resource investments with multi-variable, early exercise, various embedded options and finite reserve properties. A copper mine project offers a demonstration; the mine holder may temporarily close, reopen and abandon the mine at specific times before the expiration date. The mine holder may also accelerate mining speed to be optimal, referred to as the acceleration option. Numerical analyses of the copper price and interest rate effects on the copper mine value suggest that DOS can efficiently assess complex, multiple-variable, American-style real options problems.

Suggested Citation

  • Chung-Gee Lin & Yu-Shan Wang, 2012. "Evaluating natural resource projects with embedded options and limited reserves," Applied Economics, Taylor & Francis Journals, vol. 44(12), pages 1471-1482, April.
    • Handle: RePEc:taf:applec:44:y:2012:i:12:p:1471-1482
    DOI: 10.1080/00036846.2010.543076
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    Cited by:

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    2. Siña, Matías & Guzmán, Juan Ignacio, 2019. "Real option valuation of open pit mines with two processing methods," Journal of Commodity Markets, Elsevier, vol. 13(C), pages 30-39.
    3. Savolainen, Jyrki, 2016. "Real options in metal mining project valuation: Review of literature," Resources Policy, Elsevier, vol. 50(C), pages 49-65.

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