Numerical Valuation of the Investment Project Flexibility Based on the PDE Approach: An Option to Contract

Result code in IS VaVaI

<a href="https://www.isvavai.cz/riv?ss=detail&h=RIV%2F61989100%3A27510%2F22%3A10253000" target="_blank" >RIV/61989100:27510/22:10253000 - isvavai.cz</a>

Alternative codes found

RIV/46747885:24510/22:00011007

Result on the web

<a href="https://mme2022.vspj.cz/download/proceedings-4.pdf" target="_blank" >https://mme2022.vspj.cz/download/proceedings-4.pdf</a>

DOI - Digital Object Identifier

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Result language

angličtina

Original language name

Numerical Valuation of the Investment Project Flexibility Based on the PDE Approach: An Option to Contract

Original language description

The solution to the optimal investment decision, which captures the value of a flexibility embedded in a project, plays an important role in the decision-making process. In this paper we focus on a real options approach interpreting the flexibility value as the option premium and we extend our previous research to an option to contract operating scale according to market conditions. Following a contingent claim analysis the values of both the project and the embedded flexibility, expressed as functions of time and underlying output price (following a stochastic process), can be identified as solutions of relevant PDE systems of the Black-Scholes type. More precisely, the link between project and flexibility values is realized through a payoff function, which can be enforced with respect to the flexibility type at any time prior to or at expiration date. Due to the presence of the American constraint the real option pricing problem is not solvable analytically in general, and therefore appropriate numerical methods have to be employed. Analogously to pricing of financial options and in line with our results achieved in this field of financial engineering, the discontinuous Galerkin method is applied to solve the relevant governing equations. The capabilities of the numerical scheme resulted are illustrated on a simple contraction decision problem.

Czech name

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Czech description

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Type

D - Article in proceedings

CEP classification

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OECD FORD branch

50200 - Economics and Business

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)

Publication year

2022

Confidentiality

S - Úplné a pravdivé údaje o projektu nepodléhají ochraně podle zvláštních právních předpisů

Article name in the collection

40th International Conference Mathematical Methods in Economics 2022 : Proceedings : College of Polytechnics Jihlava : 7 – 9 September 2022, Jihlava, Czech Republic

ISBN

978-80-88064-62-6

ISSN

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e-ISSN

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Number of pages

7

Pages from-to

122-128

Publisher name

College of Polytechnics Jihlava

Place of publication

Jihlava

Event location

Coll Polytechn Jihlava

Event date

Sep 7, 2022

Type of event by nationality

EUR - Evropská akce

UT code for WoS article

000936355000020