A Hedged Monte Carlo Approach to Real Option Pricing

Edgardo Brigatti, Felipe Macias, Max O. Souza and Jorge P. Zubelli

Papers from arXiv.org

Abstract: In this work we are concerned with valuing optionalities associated to invest or to delay investment in a project when the available information provided to the manager comes from simulated data of cash flows under historical (or subjective) measure in a possibly incomplete market. Our approach is suitable also to incorporating subjective views from management or market experts and to stochastic investment costs. It is based on the Hedged Monte Carlo strategy proposed by Potters et al (2001) where options are priced simultaneously with the determination of the corresponding hedging. The approach is particularly well-suited to the evaluation of commodity related projects whereby the availability of pricing formulae is very rare, the scenario simulations are usually available only in the historical measure, and the cash flows can be highly nonlinear functions of the prices.

Date: 2015-09
New Economics Papers: this item is included in nep-ppm
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Published in Commodities, Energy and Environmental Finance, Fields Institute Communications, 74, 275-299 (2015)

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1509.03577

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