Practical guide to real options in discrete time

Sergey Levendorskiy and Svetlana Boyarchenko

No 137, Computing in Economics and Finance 2004 from Society for Computational Economics

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 paper 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 the paper is based on the use of the expected present value operators.

Keywords: Real options; embedded options; expected present value operators (search for similar items in EconPapers)
JEL-codes: C61 D81 G31 (search for similar items in EconPapers)
Date: 2004-08-11
New Economics Papers: this item is included in nep-cmp and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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http://www.eco.utexas.edu/~sboyarch/jet5.pdf main text (application/pdf)
http://repec.org/sce2004/up.7448.1077732919.pdf (application/pdf)

Related works:
Journal Article: PRACTICAL GUIDE TO REAL OPTIONS IN DISCRETE TIME (2007)
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)
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Persistent link: https://EconPapers.repec.org/RePEc:sce:scecf4:137

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