Institute for Applied Economic Research Working Paper No. 620
41 Pages Posted: 19 Apr 1999
Date Written: January 1999
The owner of a petroleum exploration concession in Brazil has an investment option until the expiration date fixed by the governmental agency, which can be extended by additional cost. The value of these rights and the optimal investment timing are calculated by solving a stochastic optimal control problem of an American call option with extendible maturities.
The uncertainty of the oil prices is modeled as a mix fusion-jump process. Normal information arrival generates continuous mean-reverting process for oil prices, whereas a random abnormal information generates a discrete jump of random size. Comparisons are performed with the popular geometric Brownian process and also the quantification and analysis of alternative timing policies for the petroleum sector.
JEL Classification: Q4, L7, E3
Suggested Citation: Suggested Citation
Guimarães Dias, Marco Antonio and Rocha, Katia, Petroleum Concessions with Extendible Options: Investment Timing and Value Using Mean Reversion and Jump Processes for Oil Prices (January 1999). Institute for Applied Economic Research Working Paper No. 620. Available at SSRN: https://ssrn.com/abstract=159692 or http://dx.doi.org/10.2139/ssrn.159692