A hedged monte carlo approach to real option pricing

Edgardo Brigatti; Felipe Macías; Max O. Souza; Jorge P. Zubelli

doi:10.1007/978-1-4939-2733-3_10

A hedged monte carlo approach to real option pricing

Edgardo Brigatti, Felipe Macías, Max O. Souza, Jorge P. Zubelli

Mathematics

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1 Scopus citations

Abstract

In this work we are concerned with valuing optionalities associated to invest or to delay investment in a project when the available information provided to the manager comes from simulated data of cash flows under historical (or subjective) measure in a possibly incomplete market. Our approach is suitable also to incorporating subjective views from management or market experts and to stochastic investment costs. It is based on the Hedged Monte Carlo strategy proposed by Potters, Bouchaud, Sestovic (Phys. A Stat. Mech. Appl. 289(3-4):517-525, 2001) where options are priced simultaneously with the determination of the corresponding hedging. The approach is particularly well-suited to the evaluation of commodity related projects whereby the availability of pricing formulae is very rare, the scenario simulations are usually available only in the historical measure, and the cash flows can be highly nonlinear functions of the prices.

Original language	British English
Pages (from-to)	275-299
Number of pages	25
Journal	Fields Institute Communications
Volume	74
DOIs	https://doi.org/10.1007/978-1-4939-2733-3_10
State	Published - 2015

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title = "A hedged monte carlo approach to real option pricing",

abstract = "In this work we are concerned with valuing optionalities associated to invest or to delay investment in a project when the available information provided to the manager comes from simulated data of cash flows under historical (or subjective) measure in a possibly incomplete market. Our approach is suitable also to incorporating subjective views from management or market experts and to stochastic investment costs. It is based on the Hedged Monte Carlo strategy proposed by Potters, Bouchaud, Sestovic (Phys. A Stat. Mech. Appl. 289(3-4):517-525, 2001) where options are priced simultaneously with the determination of the corresponding hedging. The approach is particularly well-suited to the evaluation of commodity related projects whereby the availability of pricing formulae is very rare, the scenario simulations are usually available only in the historical measure, and the cash flows can be highly nonlinear functions of the prices.",

author = "Edgardo Brigatti and Felipe Mac{\'i}as and Souza, {Max O.} and Zubelli, {Jorge P.}",

note = "Funding Information: E.B. developed this work while visiting IMPA under the Cooperation Agreement between IMPA and Petrobras. MOS was partially supported by CNPq grant 308113/2012-8 and FAPERJ. JPZ was supported by CNPq grants 302161/2003-1 and 474085/2003-1 and by FAPERJ through the programs Cientistas do Nosso Estado and Pensa Rio. All authors acknowledge the IMPA-PETROBRAS cooperation agreement. Publisher Copyright: {\textcopyright} Springer Science+Business Media New York 2015",

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AU - Macías, Felipe

AU - Souza, Max O.

AU - Zubelli, Jorge P.

N1 - Funding Information: E.B. developed this work while visiting IMPA under the Cooperation Agreement between IMPA and Petrobras. MOS was partially supported by CNPq grant 308113/2012-8 and FAPERJ. JPZ was supported by CNPq grants 302161/2003-1 and 474085/2003-1 and by FAPERJ through the programs Cientistas do Nosso Estado and Pensa Rio. All authors acknowledge the IMPA-PETROBRAS cooperation agreement. Publisher Copyright: © Springer Science+Business Media New York 2015

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Y1 - 2015

N2 - In this work we are concerned with valuing optionalities associated to invest or to delay investment in a project when the available information provided to the manager comes from simulated data of cash flows under historical (or subjective) measure in a possibly incomplete market. Our approach is suitable also to incorporating subjective views from management or market experts and to stochastic investment costs. It is based on the Hedged Monte Carlo strategy proposed by Potters, Bouchaud, Sestovic (Phys. A Stat. Mech. Appl. 289(3-4):517-525, 2001) where options are priced simultaneously with the determination of the corresponding hedging. The approach is particularly well-suited to the evaluation of commodity related projects whereby the availability of pricing formulae is very rare, the scenario simulations are usually available only in the historical measure, and the cash flows can be highly nonlinear functions of the prices.

AB - In this work we are concerned with valuing optionalities associated to invest or to delay investment in a project when the available information provided to the manager comes from simulated data of cash flows under historical (or subjective) measure in a possibly incomplete market. Our approach is suitable also to incorporating subjective views from management or market experts and to stochastic investment costs. It is based on the Hedged Monte Carlo strategy proposed by Potters, Bouchaud, Sestovic (Phys. A Stat. Mech. Appl. 289(3-4):517-525, 2001) where options are priced simultaneously with the determination of the corresponding hedging. The approach is particularly well-suited to the evaluation of commodity related projects whereby the availability of pricing formulae is very rare, the scenario simulations are usually available only in the historical measure, and the cash flows can be highly nonlinear functions of the prices.

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JO - Fields Institute Communications

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A hedged monte carlo approach to real option pricing

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