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    Pricing options on investment project expansions under commodity price uncertainty

    Access Status
    Fulltext not available
    Authors
    Li, N.
    Wang, Song
    Date
    2019
    Type
    Journal Article
    
    Metadata
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    Citation
    Li, N. and Wang, S. 2019. Pricing options on investment project expansions under commodity price uncertainty. Journal of Industrial and management optimization. 15 (1): pp. 261-273.
    Source Title
    Journal of Industrial and management optimization
    DOI
    10.3934/jimo.2018042
    ISSN
    1547-5816
    School
    School of Electrical Engineering, Computing and Mathematical Science (EECMS)
    URI
    http://hdl.handle.net/20.500.11937/74514
    Collection
    • Curtin Research Publications
    Abstract

    In this work we develop PDE-based mathematical models for valuing real options on investment project expansions when the underlying commodity price follows a geometric Brownian motion. The models developed are of a similar form as the Black-Scholes model for pricing conventional European call options. However, unlike the Black-Scholes' model, the payoff conditions of the current models are determined by a PDE system. An upwind finite difference scheme is used for solving the models. Numerical experiments have been performed using two examples of pricing project expansion options in the mining industry to demonstrate that our models are able to produce financially meaningful numerical results for the two non-trivial test problems.

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