Practical guide to real options in discrete time

Svetlana Boyarchenko; Sergei Levendorskii

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Practical guide to real options in discrete time

Svetlana Boyarchenko·Sergei Levendorskii

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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 an 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.

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Svetlana Boyarchenko, Sergei Levendorskii. 2004-04-05. Practical guide to real options in discrete time. https://arxiv.org/abs/cond-mat/0404106

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