Practical Guide to Real Options in Discrete Time Ii

28 Pages Posted: 4 Jan 2005

See all articles by Svetlana Boyarchenko

Svetlana Boyarchenko

University of Texas at Austin - Department of Economics

Sergei Levendorskii

Calico Science Consulting

Abstract

This paper is an extended version of the paper "Practical Guide to Real Options in Discrete Time" (http://ssrn.com/abstract=510324), where a general, computationally simple approach to real options in discrete time was suggested. We explicitly formulate conditions of the general theorems for basic types of real options, and explain our method in detail for the case of transition density given by exponential functions on each half-axis. To demonstrate that the discrete time approach can be more analytically tractable than the continuous time one, we consider timing of investment with lags, and a model of gradual capital expansion. We obtain simple formulas for the expected values of capital stock in every time period; in continuous time models, a much more sophisticated technique is needed.

Note: A previous version of this abstract can be found at: http://ssrn.com/abstract=510324

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 Ii. Available at SSRN: https://ssrn.com/abstract=642262 or http://dx.doi.org/10.2139/ssrn.642262

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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