Real Options Valuation of Abandoned Farmland

I investigate the decision-making process of an owner of abandoned farmland that is currently restricted to agricultural use but will be available for nonagricultural use in the future. I find that a slight probability of land conversion greatly increases the land value and discourages the owner from cultivating the land. I also observe that a small gap in the anticipation of land conversion prevents the owner from selling or leasing the land to a more efficient farmer.real option, abandoned farmland, land development, land conversion.

Optimal investment timing using Markov jump price processes

In this work, we address an investment problem where the investment can either be made immediately or postponed to a later time, in the hope that market conditions become more favourable. In our case, uncertainty is introduced through market price. When the investment is undertaken, a fixed sunk cost must be paid and a series of cash flows are to be received. Therefore, we are faced with an irreversible investment. Real options analysis provides an adequate framework for this type of problems by recognizing these two characteristics, uncertainty and irreversibility, explicitly. We describe algorithmic solutions for this type of problems by modelling market prices evolution by Markov jump processes.Irreversible investment, optimal stopping, dynamic programming, Markov jump processes

The valuation of N-phased investment projects under jump-diffusion processes

In this paper we consider N-phased investment opportunities where the time evolution of the project value follows a jump-diffusion process. An explicit valuation formula is derived under two different scenarios: in the first case we consider fixed and certain investment costs and in the second case we consider cost uncertainty and assume that investment costs follow a jump-diffusion process

An efficient lattice algorithm for the libor market model

The LIBOR Market Model (LMM or BGM) has become one of the most popular models for pricing interest rate products. It is commonly believed that Monte-Carlo simulation is the only viable method available for the LIBOR Market Model. In this article, however, we propose a lattice approach to price interest rate products within the LIBOR Market Model by introducing a shifted forward measure and several novel fast drift approximation methods. This model should achieve the best performance without losing much accuracy. Moreover, the calibration is almost automatic and it is simple and easy to implement. Adding this model to the valuation toolkit is actually quite useful; especially for risk management or in the case there is a need for a quick turnaround.LIBOR Market Model, LMM, BGM, lattice model, tree model, shifted forward measure, drift approximation, risk management, calibration, callable exotics, callable bond, callable capped floater swap, callable inverse floater swap, callable range accrual swap

Equilibruim approach of asset pricing under Lévy process

This work considers the equilibrium approach of asset pricing for Lévy process. It derives the equity premium and pricing kernel analytically for the stock price process, obtains an equilibrium option pricing formula, and explains some empirical evidence such as the negative variance risk premium, implied volatility smirk, and negative skewness risk premium by comparing the physical and risk-neutral distributions of the log return. Different from most of the current studies in equilibrium pricing under jump diffusion models, this work models the underlying asset price as the exponential of a Lévy process and thus allows nearly an arbitrage distribution of the jump component. © 2012 Elsevier B.V. All rights reserved.postprin

An efficient lattice algorithm for the libor market model

The LIBOR Market Model has become one of the most popular models for pricing interest rate products. It is commonly believed that Monte-Carlo simulation is the only viable method available for the LIBOR Market Model. In this article, however, we propose a lattice approach to price interest rate products within the LIBOR Market Model by introducing a shifted forward measure and several novel fast drift approximation methods. This model should achieve the best performance without losing much accuracy. Moreover, the calibration is almost automatic and it is simple and easy to implement. Adding this model to the valuation toolkit is actually quite useful; especially for risk management or in the case there is a need for a quick turnaround

Designing regulatory frameworks for merchant transmission investments by real options analysis

In deregulated electricity markets, the transmission network is a key infrastructure for enabling competition in the generation sector. A deficient expansion of the transmission grid prevents the realization of the benefits in terms of efficiency associated with market mechanisms. Consequently, it is essential to provide clear investment policies and economic signals to attract timely and efficient transmission in order to be developed at minimum cost, with adequate levels of service quality and reliability, and adapted to the requirements of generators and consumers. This paper proposes a modern tool of economic evaluation based on Real Options Analysis that provides the regulator the ability to assess various incentives that allow transmission investors to make efficient decisions in highly uncertain environments. Real Options properly values partially irreversible investment decisions, such as to defer, modify or abandon an investment project in response to the arrival of new information or as uncertainties are resolved. Decisions are evaluated from the point of view of an agent trying to maximize its own profits in the time period set to recover the capital invested. The results of this paper allow the study of the behavior of transmission investors regarding their decision making when they have the possibility to manage the option to defer, under different regulatory schemes that encourage the expansion of the transmission systemFil: Pringles, Rolando Marcelo. Consejo Nacional de Investigaciones Cientificas y Tecnicas. Centro Cientifico Tecnologico San Juan. Instituto de Energia Electrica; ArgentinaFil: Olsina, Fernando Gabriel. Consejo Nacional de Investigaciones Cientificas y Tecnicas. Centro Cientifico Tecnologico San Juan. Instituto de Energia Electrica; ArgentinaFil: Garces, Francisco Felipe. Consejo Nacional de Investigaciones Cientificas y Tecnicas. Centro Cientifico Tecnologico San Juan. Instituto de Energia Electrica; Argentin