Dynamic Investment in Extraction Capacity of Exhaustible Resources
نویسنده
چکیده
This paper applies real options theory into a resource extraction problem with capacity constraints and demand uncertainty. The producer decides on the optimal rate of extraction and the optimal time to build further capacity simultaneously. It is shown that previous results which suggest that extraction capacity should be built at the beginning, are not necessarily true under uncertainty. The model characterizes the optimal path of capacity investments. Using Monte Carlo simulation, the model generates term-structure of forward prices and their volatility. The results of this paper can contribute to better understanding of long-run energy and commodity price dynamics.
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