PRACTICAL GUIDE TO REAL OPTIONS IN DISCRETE TIME

Svetlana Boyarchenko and Sergei Levendorski&icaron;

International Economic Review, 2007, vol. 48, issue 1, 311-342

Abstract: Continuous time models in the theory of real options give explicit formulas for optimal exercise strategies when options are simple and the price of an underlying asset follows a geometric Brownian motion. This article suggests a general, computationally simple approach to real options in discrete time. Explicit formulas are derived even for embedded options. Discrete time processes reflect the scarcity of observations in the data, and may account for fat tails and skewness of probability distributions of commodity prices. The method of this article is based on the use of the expected present value operators. Copyright 2007 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.

Date: 2007
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Related works:
Working Paper: Practical guide to real options in discrete time II (2005)
Working Paper: Practical guide to real options in discrete time (2004)
Working Paper: Practical guide to real options in discrete time (2004)
Working Paper: Practical guide to real options in discrete time (2004)
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