Abstract
This paper examines the effect of uncertainty on investment in a real option model. By introducing the contingent claims analysis the opportunity to invest is modeled as an American call option with expiring time. By the use of penalty function, the American option model can rationally analyze the uncertainty-investment relationship. We show that the optimal exercise boundary exhibits a U-shaped pattern against the volatility of the project. Furthermore, such a pattern is inherited by the expected time to exercise the investment option.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
