Practical Guide to Real Options in Discrete Time

28 Pages Posted: 6 Mar 2004

See all articles by Svetlana Boyarchenko

Svetlana Boyarchenko

University of Texas at Austin - Department of Economics

Sergei Levendorskii

Calico Science Consulting

Multiple version iconThere are 2 versions of this paper

Date Written: February 24, 2004

Abstract

Continuous time models in the theory of real options give explicit formulas for optimal exercise strategies when options are simple and the price of the underlying asset follows a geometric Brownian motion. This paper suggests a general, computationally simple approach to real options in discrete time. Explicit formulas are derived even for embedded options. Discrete time processes reflect the scarcity of observations in the data, and may account for fat tails and skewness of probability distributions of commodity prices. The method of the paper is based on the use of the expected present value operators.

Note: An updated version of this abstract can be found at: http://ssrn.com/abstract=642262

Keywords: Real options, embedded options, expected present value operators

JEL Classification: D81, C61, G31

Suggested Citation

Boyarchenko, Svetlana I. and Levendorskii, Sergei Z., Practical Guide to Real Options in Discrete Time (February 24, 2004). Available at SSRN: https://ssrn.com/abstract=510324 or http://dx.doi.org/10.2139/ssrn.510324

Svetlana I. Boyarchenko (Contact Author)

University of Texas at Austin - Department of Economics ( email )

Austin, TX 78712
United States

Sergei Z. Levendorskii

Calico Science Consulting ( email )

Austin, TX
United States

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