Numerical Valuation of Investment Opportunities under Two-Factor Uncertainty

Result code in IS VaVaI
<a href="https://www.isvavai.cz/riv?ss=detail&h=RIV%2F61989100%3A27510%2F23%3A10258728" target="_blank" >RIV/61989100:27510/23:10258728 - 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
—

Result language
angličtina
Original language name
Numerical Valuation of Investment Opportunities under Two-Factor Uncertainty
Original language description
Real options approach applies to a wide range of investment opportunities in order to help investors achieve better risk management and more robust financial outcomes. In this paper we focus on a decision-making framework that incorporates two sources of uncertainty in evaluating strategic investments, namely unit output commodity price and unit cost. Incorporating both factors provides a more realistic and accurate approach to evaluating embedded flexibilities, especially in highly uncertain environments. Using contingent claim analysis, the values of investment opportunities can be identified as solutions to the relevant two-factor Black-Scholes equations, adjusted to match the specific features of real options. As explicit formulae for this kind of PDE problem are only available in certain scenarios (as for conventional financial options), one must rely on numerical techniques in general. Inspired by the methodology from numerical valuation of one-factor real options, we employ and extend the discontinuous Galerkin approach to the two-factor option case exercisable at a fixed time (i.e., European-style option). Finally, the proposed numerical scheme is applied to a simple conceptual expansion decision problem for illustration purposes.
Czech name
—
Czech description
—

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
2023
Confidentiality
S - Úplné a pravdivé údaje o projektu nepodléhají ochraně podle zvláštních právních předpisů

Article name in the collection
MME 2023 : Proceedings of the 41st International Conference on Mathematical Methods in Economics : September 13–15, 2023, Prague, Czech Republic
ISBN
978-80-11-04132-8
ISSN
2788-3965
e-ISSN
—
Number of pages
6
Pages from-to
117-122
Publisher name
Czech Society for Operations Research
Place of publication
Praha
Event location
Praha
Event date
Sep 13, 2023
Type of event by nationality
CST - Celostátní akce
UT code for WoS article
001551108000020

Similar results(10)