Pricing options on investment project expansions under commodity price uncertainty
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 option...
| Main Authors: | , |
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| Format: | Journal Article |
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American Institute of Mathematical Sciences
2019
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| Online Access: | http://hdl.handle.net/20.500.11937/74514 |
| _version_ | 1848763296371441664 |
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| author | Li, N. Wang, Song |
| author_facet | Li, N. Wang, Song |
| author_sort | Li, N. |
| building | Curtin Institutional Repository |
| collection | Online Access |
| description | 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. |
| first_indexed | 2025-11-14T11:01:12Z |
| format | Journal Article |
| id | curtin-20.500.11937-74514 |
| institution | Curtin University Malaysia |
| institution_category | Local University |
| last_indexed | 2025-11-14T11:01:12Z |
| publishDate | 2019 |
| publisher | American Institute of Mathematical Sciences |
| recordtype | eprints |
| repository_type | Digital Repository |
| spelling | curtin-20.500.11937-745142019-08-22T03:49:09Z Pricing options on investment project expansions under commodity price uncertainty Li, N. Wang, Song 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. 2019 Journal Article http://hdl.handle.net/20.500.11937/74514 10.3934/jimo.2018042 American Institute of Mathematical Sciences restricted |
| spellingShingle | Li, N. Wang, Song Pricing options on investment project expansions under commodity price uncertainty |
| title | Pricing options on investment project expansions under commodity price uncertainty |
| title_full | Pricing options on investment project expansions under commodity price uncertainty |
| title_fullStr | Pricing options on investment project expansions under commodity price uncertainty |
| title_full_unstemmed | Pricing options on investment project expansions under commodity price uncertainty |
| title_short | Pricing options on investment project expansions under commodity price uncertainty |
| title_sort | pricing options on investment project expansions under commodity price uncertainty |
| url | http://hdl.handle.net/20.500.11937/74514 |