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PRACTICAL GUIDE TO REAL OPTIONS IN DISCRETE TIME *
Author(s) -
Boyarchenko Svetlana,
Levendorskiǐ Sergei
Publication year - 2007
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/j.1468-2354.2007.00427.x
Subject(s) - discrete time and continuous time , geometric brownian motion , simple (philosophy) , skewness , mathematical economics , commodity , asset (computer security) , econometrics , value (mathematics) , economics , brownian motion , computer science , mathematics , finance , statistics , philosophy , economy , computer security , diffusion process , epistemology , service (business)
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 article 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 this article is based on the use of the expected present value operators.