Real options with endogenous convenience yield

Traditional real options theory highlights the impact of risk on the timing of investment decisions. However, in practice, corporate projects often involve a preliminary exploratory stage, incurring a running cost and convenience yield. By analogy with commodity futures theories, we model such multistage corporate projects in a feedback‐control framework, with a dynamic aggregate convenience yield/running cost that interacts with the decisions to enter or exit the preliminary stage. We provide a closed‐form solution for this compound options model. The solution provides insight and quantifies of the optimal strategy for prevalent corporate projects with a preliminary exploration stage.