Portfolio Real Option Based on Trigeminal Tree Model in Sustainable Utilization of Exploration Asset

Abstract

Uncertainty of crude oil market causes the value of oil and gas exploration assets to fluctuate upward, remain unchanged, and fluctuate downward. So exploration project investment is usually chartered by multistages. This brings many challenges to investment decisions regarding the sustainable utilization of exploration assets. To avoid the investment risk of exploration projects, a portfolio option method based on the trigeminal tree model was proposed. By analysing the real options involved in oil and gas exploration assets, the investment process is divided into European options and American options. The pricing model of portfolio options is constructed by the trigeminal tree method, and sequential compound diagram and compound option diagram are built. Volatility is predicted based on the GARCH model, and then, the trinomial tree of the underlying asset value, evolution chart, sequential compound option chart, and portfolio option chart is established, respectively. Finally, the project option value is calculated. The application shows that the ROV of oil and gas exploration project of company A is 1.39 million US$ (USMM$), and the project value is 279.87 USMM$. Compared with the binary tree model, the model is superior to the traditional option pricing method in the application effect, which provides a scientific basis for investment decision-making.