We extend the Geske (1979) model to a multivariate normal integral for the valuation of a compound real option. We compared the computing speeds and errors of three numerical integration methods, namely, Drezner's improved Gauss quadrature method, Monte Carlo method and Lattice method, together with appropriate critical value finding methods. It is found that secant method for finding critical values combined with Lattice method and run by Fortran took merely one second, Monte Carlo method 120 seconds. It is also found that the real option decreases with interest rate, not necessarily positively correlated with volatility σ, a result different from that anticipated under financial option theory. This is mainly because the underlying of real option is a non-traded asset, which brings dividend-like yield into the formula of compound real options. Dividend-like yield rises with the multiplication of correlation coefficient ρ and σ. High ρ indicates the poor diversification advantage of the new investment project in relation to the existing market portfolio, and the value of real call option decreases with σ. Conversely, when ρ is low, the proposed project provides better diversification advantage and the real call option rises with σ. Irrespective of the value of ρ, when interest rate increases, the value of real call option drops, especially when ρ is high, the value of the project is dominated by interest rate.
Review of Quantitative Finance and Accounting – Springer Journals
Published: Oct 13, 2004
It’s your single place to instantly
discover and read the research
that matters to you.
Enjoy affordable access to
over 18 million articles from more than
15,000 peer-reviewed journals.
All for just $49/month
Query the DeepDyve database, plus search all of PubMed and Google Scholar seamlessly
Save any article or search result from DeepDyve, PubMed, and Google Scholar... all in one place.
Get unlimited, online access to over 18 million full-text articles from more than 15,000 scientific journals.
Read from thousands of the leading scholarly journals from SpringerNature, Elsevier, Wiley-Blackwell, Oxford University Press and more.
All the latest content is available, no embargo periods.
“Hi guys, I cannot tell you how much I love this resource. Incredible. I really believe you've hit the nail on the head with this site in regards to solving the research-purchase issue.”Daniel C.
“Whoa! It’s like Spotify but for academic articles.”@Phil_Robichaud
“I must say, @deepdyve is a fabulous solution to the independent researcher's problem of #access to #information.”@deepthiw
“My last article couldn't be possible without the platform @deepdyve that makes journal papers cheaper.”@JoseServera