Real option pricing for market uncertainties
Teoh, Chin-Chuen (2004) Real option pricing for market uncertainties. Masters thesis, Iowa State University.
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This work provides a detailed explanation of several major methods used in real option analysis. The major methods include traditional Black-Scholes Option-Pricing Method, Binomial and Trinomial Lattice Methods, Monte Carlo Simulation Method, and Finite Element Method. It also shows application of these methods to solve complex option problems. The application of each technique with various examples, all written in MATLAB is compared. The advantages and disadvantages of each method are summarized. Each method’s assumptions are discussed as they represent an important element of limitation when interpreting results. Key variables of each method are carefully discussed as each variable value affects the outcome. All methods provide similar results when the problems are simple but not when the problems are more complex. The Black-Scholes method provides an analytical solution. Numerical solutions are presented for the Lattice methods, Monte Carlo Simulation method and the Finite Element method.
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