Wavelet Method for Valuation of Options on Investment Project Expansion
The result's identifiers
Result code in IS VaVaI
<a href="https://www.isvavai.cz/riv?ss=detail&h=RIV%2F46747885%3A24510%2F23%3A00014624" target="_blank" >RIV/46747885:24510/23:00014624 - isvavai.cz</a>
Result on the web
<a href="https://mme2023.vse.cz/mme_2023_proceedings.pdf" target="_blank" >https://mme2023.vse.cz/mme_2023_proceedings.pdf</a>
DOI - Digital Object Identifier
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Alternative languages
Result language
angličtina
Original language name
Wavelet Method for Valuation of Options on Investment Project Expansion
Original language description
The paper addresses the pricing of options to expand, which are types of real options that allow expanding an investment project at a future date. Under the assumption that the underlying commodity price follows a geometric Brownian motion, the model for the valuation of the expansion option can be represented by a partial differential equation of the Black-Scholes type. Unlike options in finance, however, in the case of real options, there is no analytic solution, the payoff function itself is computed as a solution to a differential equation, and appropriate boundary functions have to be determined. The paper introduces the model for pricing expansion options and proposes a wavelet-based method for its numerical solution. The method employs the Crank-Nicolson scheme combined with the Galerkin method using a cubic spline wavelet basis. Numerical experiments are performed for the benchmark problem in the iron-ore mining industry. From a numerical point of view, the advantages are the higher-order convergence rate and the small number of iterations needed to resolve the problem with the required accuracy.
Czech name
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Czech description
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Classification
Type
O - Miscellaneous
CEP classification
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OECD FORD branch
50401 - Sociology
Result continuities
Project
<a href="/en/project/GA22-17028S" target="_blank" >GA22-17028S: Flexible tools for strategic investments and decision-making: analysis, valuation and implementation</a><br>
Continuities
P - Projekt vyzkumu a vyvoje financovany z verejnych zdroju (s odkazem do CEP)
Others
Publication year
2023
Confidentiality
C - Předmět řešení projektu podléhá obchodnímu tajemství (§ 504 Občanského zákoníku), ale název projektu, cíle projektu a u ukončeného nebo zastaveného projektu zhodnocení výsledku řešení projektu (údaje P03, P04, P15, P19, P29, PN8) dodané do CEP, jsou upraveny tak, aby byly zveřejnitelné.