Option Valuation

Real option valuation (ROV) Recently, Gupta and Maranas (2004) revisited a real-option-based concept to project evaluation and risk management. This framework provides an entirely different approach to NPV-based models. The method relies on the arbitrage-free pricing principle and risk neutral valuation. Reconciliation between this approach and the above-described risk definitions is warranted. 

Danthine J.P. and Donaldson J.B. 2002. Intermediate Financial Theory. Prentice Hall, New Jersey. De Reyck B., Degraeve Z. and Vandenborre R. 2001. Project Options Valuation with Net Present Value and Decision Tree Analysis. Working Paper, London Business School. Presented at 2001 INFORMS. INFORMS Conference, Miami Beach, November. 

Carr P, Madan D (1999) Option valuation using the Fast Fourier Transform. Journal of Computational Finance 3 463-520. 

Jarrow R, Rudd A (1982) Approximate Option Valuation for Arbitrary Stochastic Processes. Journal of Einancial Economics 10 347-369. 

In the following chapter, we tie in the work on dynamics of asset prices to option valuation models. 

Baxter, M., Rennie, A., 1996. Financial Calculus. Cambridge University Press, Cambridge. Boyle, P., 1986. Option valuation using a three jump process. Int. Options J. 3, 7-12. 

James, J., Webber, N., 2000. Interest Rate Modelling. Wiley, Chichester, Chapters 3-5,7-9,15-16. Jamshidian, F., 1991. Bond and option valuation in the Gaussian interest rate model. Res. Finance 9, 131-170. 

Jamshidian, F., 1996. Bond, futures and option valuation in the quadratic interest rate model. Appl. Math. Finance 3, 93-115. 

Following the risk neutral theory, the credit spread is not included into option valuation because it is independent from the default risk of the underlying asset. The inclusion of credit spread overvalues the option. 

Incorrect calibration produces errors in option valuation that may be discovered only after significant losses have been suffered. If the necessary data are not available to calibrate a sophisticated model, a simpler one may need to be used. This is not an issue for products priced in major currencies such as the dollar, sterling, or euro, but it can be a problem for other currencies. That might be why the B-S model is still widely used today, although models such as the Black-Derman-Toy and the one proposed in Brace, Gatarek, and Musiela (1994) are increasingly employed for more exotic option products. 

Boyle, P. 1986. Option Valuation Using a Three Jump Process. International Options Journal 3, 7—12. 

Once the options have been clearly defined it will be necessary to carry out a cost-benefit analysis of each option. This has two main objectives. First, the overall cost of the project will need to be assessed to determine whether or not it is financially viable and, second, to ensure that those who will be required to incur expenditure are fully aware of the commitment needed. The financial benefits to users of the waters for recreation, fisheries, navigation, etc., are relatively easy to determine, but monetary valuation of the environmental benefits such as conservation and general amenity will be more difficult to define. As yet this aspect of the cost-benefit analysis has not been fully developed in the UK. Having determined a range of options and costs for eutrophication control in a particular catchment, consultation on the details of the Action plan with all those involved is needed before any plan can be implemented. 

The best modeling framework for R D options is, however, more contentious. The famous, or infamous, Black-Scholes formula [8], based on valuation of traded hnancial options, has in our view impeded the practical use of decision analysis methods by scientihc managers ... 

In order for various environmental impacts to be measured on a single scale, they must be valued in monetary units. The monetary valuation of different effects is not a straightforward procedure since many of the effects have no direct market value. To set a total value on the environment, relevant values are divided into three groups use values, option values and non-use values. 

Nevertheless, economic valuation is still the best available option when trying to allocate resources to protect the environment or human health. Why ... 

Because some sort of valuation and ranking of options always have and always will take place in decision making. The choice is between using economic values derived in a consistent and transparent way (environmental economics approach), or to use arbitrary and random economic or other values estimated in a case-by-case setting. And the authors of this chapter are in favour of a transparent approach that is open for improvements. 

Besides the two steps classification and characterisation, which are mandatory according to ISO 14042 [17], the LCIA in this case study also includes the optional steps normalisation and valuation (weighting). 

Vol. 571 T. Herwig, Market-Conform Valuation of Options. VIII, 104 pages. 2006. 

Techniques that may be used in making decisions lelated to pollution control aie briefly discussed. A hierarchy of objectives is a convenient way to structure the problem. The decision analysis includes valuation of effects which will depend on social values and attitudes in the society. The uncertainties in several steps of the analysis will normally be considerable the mryor uncertainty is often in the dose-response relationships. The use of expert panels to obtain such relationships is discussed. Finally an ongoing study of costs and benefits of control options for ait pollution in Oslo is used as an illustration. 

In the valuation of effects (Fig.. 2, bottom box), an assessment is made of the relative importance of the various effects arising from each control option. The aim is to arrive at some sort of overall measure of the value of the option considered. This value is then compared to the costs of the action to obtain a net benefit. The valuation of effects (cf. Section 2) will depend on the social values and attitudes of individuals or groups in the society. It is therefore an entirely subjective activity. 

Full lifecycle costing has not been applied to the delivery of alternative fuels. Any strategy to select appropriate delivery systems should involve full lifecycle valuation of the options. Lifecycle cost analyses should compare gaseous and liquid hydrogen delivery and hydrogen carrier media such as metal and chemical hydrides, methanol, and ammonia. Multiple delivery infrastructures may be essential, which could add to the price of transitioning to a hydrogen economy. 

The contingent valuation method, however, has the potential directly to consider such values and it was therefore selected for the Milan case study. An application of this method also permits the researchers to focus specifically on the quality characteristics that are most relevant from a policy point of view, in terms of pollution control options. 

This study was in many respects a pioneering application of the C VM in Italy. Many insights have been gained that may be useful for future Italian C VM studies. For example, it was concluded at an early stage that face-to-face interviews were the only reasonable data collection option. At present, the response rates that can be expected for postal questionnaires are too low, and telephone interviews are only likely to be useful for valuation issues that are already familiar to the respondents before the interview. Moreover, the face-to-face interviews turned out to work rather well in practice. A high response rate was obtained and no interviewer bias was foimd. The lack of predictability and other problems related to the benefit estimates cannot be blamed on the face-to-face interviews per se. These problems concern instead the types of data that were collected by the inter-... 

Decision analysis (Raiffa 1968) is a very general approach to option evaluation and selection. It involves identification of action alternatives and possible consequences, identification of the probabilities of these consequences, identification of the valuation placed by the decision maker upon these consequences, computation of the expected value of the consequences, and aggregation or summarization of these values for aU consequences of each action. In doing this we obtain an evaluation of each alternative act, and the one with the highest value is the most preferred action or option. 

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