A novel stochastic modeling framework for coal production and logistics through options pricing analysis

Mesias Alfeus () and James Collins ()
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Mesias Alfeus: University of Stellenbosch
James Collins: INSEAD Asia Campus

Financial Innovation, 2023, vol. 9, issue 1, 1-19

Abstract: Abstract We propose a novel stochastic modeling framework for coal production and logistics using option pricing theory. The problem of valuing the inherent real optionality a coal producer has when mining and processing thermal coal is modelled as pricing spread options of three assets under the stochastic volatility model. We derive a three-dimensional Fast Fourier Transform (“FFT”) lower bound approximation to value the inherent real optionality and for robustness check, we compare the semi-analytical pricing accuracy with the Monte Carlo simulation. Model parameters are estimated from the historical monthly data, and stochastic volatility parameters are obtained by matching the Kurtosis of the low-ash diff data to the Kurtosis of the stochastic volatility process which is assumed to follow Cox–Ingersoll–Ross (“CIR”) model.

Keywords: Stochastic volatility; Real option analysis; Fast Fourier transform method; Coal; Monte-Carlo; Closed-form solution (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:spr:fininn:v:9:y:2023:i:1:d:10.1186_s40854-022-00440-8

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DOI: 10.1186/s40854-022-00440-8

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