An Application of Financial Mathematics, using Real Option Analysis, on Coal Production and Logistics

28 Pages Posted: 20 Apr 2022

See all articles by Mesias Alfeus

Mesias Alfeus

Department of Statistics and Actuarial Science - Stellenbosch University

James Collins

Independent

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Date Written: March 22, 2022

Abstract

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

Suggested Citation

Alfeus, Mesias and Collins, James, An Application of Financial Mathematics, using Real Option Analysis, on Coal Production and Logistics (March 22, 2022). Available at SSRN: https://ssrn.com/abstract=4063351 or http://dx.doi.org/10.2139/ssrn.4063351

Mesias Alfeus

Department of Statistics and Actuarial Science - Stellenbosch University ( email )

Matieland
m
Stellenbosch, 7602
South Africa
0633236629 (Phone)
7405 (Fax)

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