Real Options Estimate Using Probabilistic Present Worth Analysis

David Carmichael, Ariel Hersh and Praneeth Parasu

The Engineering Economist, 2011, vol. 56, issue 4, 295-320

Abstract: The article presents a method for estimating the value of a real option using probabilistic present worth analysis. The method is shown to capture the upside value of a real option in an equivalent way as—and provide similar results to— the Black-Scholes method. Its strength lies in its intuitive appeal, the avoidance of having to estimate volatility, relaxed assumptions, and the simplicity of the underlying calculations. A comparison with the Black-Scholes method is undertaken in structural terms, with differences noted, and numerically for a range of input parameters. The proposed method is also applicable to evaluating financial options.

Date: 2011
References: Add references at CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://hdl.handle.net/10.1080/0013791X.2011.624259 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:uteexx:v:56:y:2011:i:4:p:295-320

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/UTEE20

DOI: 10.1080/0013791X.2011.624259

Access Statistics for this article

The Engineering Economist is currently edited by Sarah Ryan

More articles in The Engineering Economist from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().