Abstract
A combined multinomial pricing model is proposed for pricing mining concession in which the annualized volatility of the price of mineral products follows a multinomial distribution. First, a combined multinomial pricing model is proposed which consists of binomial pricing models calculated according to different volatility values. Second, a method is provided to calculate the annualized volatility and the distribution. Third, the value of convenience yields is calculated based on the relationship between the futures price and the spot price. The notion of convenience yields is used to adjust our model as well. Based on an empirical study of a Chinese copper mine concession, we verify that our model is easy to use and better than the model with constant volatility when considering the changing annualized volatility of the price of the mineral product.
Highlights
It is very important for a mining company to set reasonable prices for mining concessions
In order to take into consideration the notion that the annualized volatility of the price of mineral products may experience relatively significant variations from year to year, we propose a combined multinomial pricing model for pricing mining concessions
This study proposes a combined multinomial pricing model based on the assumption that the annualized volatility of the price of a mineral product follows a multinomial distribution
Summary
It is very important for a mining company to set reasonable prices for mining concessions. In China, mining resources belong to the state. A mining company must first purchase the mining concession. A mining company can profit from transferring mining concessions that they have purchased. Mining concession’s appreciation can have a favorable impact on the valuation of the mining company. A relatively large error in the estimation of the price of the mining concession during the evaluation step can result in a loss of the company’s economic benefits
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