An Application of Financial Mathematics, Using Real Option Analysis, on Coal Production and Logistics
28 Pages Posted: 29 Mar 2022
Date Written: March 7, 2022
We present an application of Financial Mathematics (using Real Option Analysis) to value the inherent optionality a coal producer has when mining and processing thermal coal. The pay-off of the physical option can be modelled as a spread option, whereby both the underlyings, and more unusually, the strike all follow stochastic processes. The volatilities for each are modelled to be stochastic. We derive a lower bound approximation to value the inherent optionality and compare this to Monte Carlo simulation.
Keywords: Stochastic Volatility; Option-Pricing Theory; real option theory; Black-Scholes formula; Spread-option; Rainbow Option; FFT Method; Coal; Monte-Carlo;Closed-Form Solution; Fat-Tails
JEL Classification: C6, C63, G1, G13
Suggested Citation: Suggested Citation