Numerical Valuation of Investment Opportunities under Two-Factor Uncertainty

Kód výsledku v 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>

Výsledek na webu

<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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Jazyk výsledku

angličtina

Název v původním jazyce

Numerical Valuation of Investment Opportunities under Two-Factor Uncertainty

Popis výsledku v původním jazyce

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.

Název v anglickém jazyce

Numerical Valuation of Investment Opportunities under Two-Factor Uncertainty

Popis výsledku anglicky

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.

Druh

D - Stať ve sborníku

CEP obor

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OECD FORD obor

50200 - Economics and Business

Projekt

<a href="/cs/project/GA22-17028S" target="_blank" >GA22-17028S: Flexibilní nástroje pro strategické investice a rozhodování: analýza, oceňování a implementace</a><br>

Návaznosti

P - Projekt vyzkumu a vyvoje financovany z verejnych zdroju (s odkazem do CEP)

Rok uplatnění

2023

Kód důvěrnosti údajů

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

Název statě ve sborníku

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

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Počet stran výsledku

6

Strana od-do

117-122

Název nakladatele

Czech Society for Operations Research

Místo vydání

Praha

Místo konání akce

Praha

Datum konání akce

13. 9. 2023

Typ akce podle státní příslušnosti

CST - Celostátní akce

Kód UT WoS článku

001551108000020