Real Options Valuation: A Monte Carlo Approach
Andrea Gamba
Warwick Business School - University of Warwick
December 2003
Faculty of Management, University of Calgary WP No. 2002/3; EFA 2002 Berlin Meetings Presented Paper
Abstract:
This paper provides a numerical approach based on a Monte Carlo simulation for valuing dynamic capital budgeting problems with many embedded real options dependent on numerous state variables. We propose a way of decomposing a complex capital budgeting problem with many options into a set of simple options, suitably accounting for interaction and interdependence among them. The decomposition approach is numerically implemented using an extension of the Least Squares Monte Carlo algorithm, presented by Longstaff and Schwartz (2001) applied to our multi-option setting. We also provide a number of applications of our approach to well-known real options models and real life capital budgeting problems. Moreover, we present a set of numerical experiments to provide evidence for the accuracy of the proposed methodology.
Number of Pages in PDF File: 71
JEL Classification: C15, C63, G13, G31
working papers series
Suggested Citation
Gamba, Andrea, Real Options Valuation: A Monte Carlo Approach (December 2003). Faculty of Management, University of Calgary WP No. 2002/3; EFA 2002 Berlin Meetings Presented Paper. Available at SSRN: http://ssrn.com/abstract=302613 or http://dx.doi.org/10.2139/ssrn.302613
