Practical guide to real options in discrete time II

Svetlana Boyarchenko and Sergei Levendorskii
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Sergei Levendorskii: The University of Texas at Austin

Finance from University Library of Munich, Germany

Abstract: This paper is an extended version of the paper 'Practical Guide to Real Options in Discrete Time' (http://econwpa.wustl.edu:80/eps/fin/papers/0405/0405016.pdf), where a general, computationally simple approach to real options in discrete time was suggested. We explicitly formulate conditions of the general theorems for basic types of real options, and explain our method in detail for the case of transition density given by exponential functions on each half-axis. To demonstrate that the discrete time approach can be more analytically tractable than the continuous time one, we consider timing of investment with lags, and a model of gradual capital expansion. We obtain simple formulas for the expected values of capital stock in every time period; in continuous time models, a much more sophisticated technique is needed.

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)
Pages: 28 pages
Date: 2005-01-31
Note: Type of Document - pdf; pages: 28
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https://econwpa.ub.uni-muenchen.de/econ-wp/fin/papers/0501/0501014.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 (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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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpfi:0501014

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