Volatility is a significant parameter both in financial and real options valuation. However, in the case of several real option projects there is no historical data available. In such cases, one alternative is to use Monte Carlo simulation on projects’ cash flows for volatility estimation. An important issue that has not been taken into account with most of these volatility simulation procedure...

In this paper, we develop two models for the valuation of information technology (IT) investment projects using the real options approach. The IT investment projects discussed in this paper are categorized into development and acquisition projects, depending upon the time it takes to start benefiting from the IT asset once the decision to invest has been taken. The models account for uncertaint...

Over many years, securitization has proven to be an expedient and highly flexible refinancing tool for corporates and public sector entities that seek a more accurate capital-market based valuation of asset performance. After successful securitization by public sector entities in advanced countries, also sovereigns in emerging economies are becoming adept at securitization as an efficient means...

In this paper, we study the McDonald-Siegel (MS) model for real options under the assumption that the spanning asset undergoes a stochastic volatility dynamics that reverts to a historical value according to an Ornstein-Uhlenbeck process driven by a second source of uncertainty. In this case, the market is not complete, and valuation, even for a perfectly correlated asset, is not as straightfor...

A replacement model is presented for a productive asset subject to stochastic input decay, tax allowances due to a deterministic depreciation variable, and a fixed investment cost. The risk neutral valuation function is formulated and optimal trigger levels signalling replacement for the two factors is determined analytically although not as a closed-form solution. We demonstrate that the opera...

In the present paper we explore the problem for pricing discrete barrier options utilizing the Black–Scholes model for the random movement of the asset price. We postulate the problemas a path integral calculation by choosing approach that is similar to the quadrature method. Thus, the problem is reduced to the estimation of a multi-dimensional integral whose dimension corresponds to the number...

We consider the problem of explicitly pricing and hedging an option written on a nonexchangeable asset when trading in a correlated asset is possible. This is a typical case of incomplete market where it is well known that the super-replication concept provides generally too high prices. Here, following J.H. Cochrane and J. Saá-Requejo, we study valuation under No Good Deal (NGD) Assumption. Fi...

We can get the fair value of any financial derivative either analytically, by simulation or applying suitable numerical technique. For example, when we solve the American option valuation problem, the lattice models can be very useful. The procedure is based on modeling of the underlying asset price evolution (in discrete time with discrete price increments) and subsequent evaluation of the pay...

This article develops a numerical method to price American-style Asian option in the context of the generalized autoregressive conditional heteroscedasticity (GARCH) asset return process. The development is based on dynamic programming coupled with the replacement of the normally distributed variable with a binomial one and the whole procedure is under the locally risk-neutral valuation relatio...

Performance-dependent options are financial derivatives whose payoff depends on the performance of one asset in comparison to a set of benchmark assets. In this paper, we present a novel approach for the valuation of general performance-dependent options. To this end, we use a multidimensional Black-Scholes model to describe the temporal development of the asset prices. The martingale approach ...