The real options approach to valuation - Haskayne School of Business

Main Results • For a given contractual arrangement the value of the expropria*on op*on increases with – The spot price – The slope of the futures curve (contango, backwarda*on) – The vola*lity of the spot (futures) price • For a given set of state variables the value of the expropria*on op*on decreases with the – Tax rate – Various expropria*on costs • The increase in the field’s value to the government due to expropria*on risk is always smaller than the decrease in the field value to the firms, since there are “deadweight losses” associated with expropria*on (produc*on inefficiency and “reputa*onal costs”)