The real options approach to valuation - Haskayne School of Business
The real options approach to valuation - Haskayne School of Business
The real options approach to valuation - Haskayne School of Business
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Solu*on Procedure • Expropria*on op*on can be exercised at any *me during the life <strong>of</strong> the op*on: American-‐style (LSM) • At every point in *me the government must compare the value <strong>of</strong> immediate exercise with the condi*onal expected value (under the risk neutral measure) <strong>of</strong> con*nua*on • Outcome is the op*mal exercise *me for each simulated path which can be used <strong>to</strong> value the expropria*on op*on • We can also es*mate the value <strong>of</strong> the oil field <strong>to</strong> the government and the firm both in the presence and absence <strong>of</strong> expropria*on risk
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