Real Option Pricing with Mean-Reverting Investment and Project Value.

Jorge Zubelli | Jaimungal, Sebastian | Souza, Max

Keywords: Real Options; Quantitative Finance; Investment under Uncertainty

In this work we are concerned with real option prices when the project value V_t and the investment value I_t undergo a mean-reverting stochastic dynamics. We consider the question of finding the dynamics for which an investment trigger curve, based on the ratio V_t /I_t, can be determined. For a particular class of mean-reverting processes, we show that the investment frontier can be represented by such a ratio. In particular, the dynamics of the ratio is also mean-reverting. For more general dynamics, which might include jumps, the above reductions do not seem to be possible, and a Fast Fourier Stepping Method, developed by Jackson, Jaimungal, and Surkov (2008) and Jaimungal and Surkov (2009), is discussed instead.

Anexos:

• jsz2009.pdf