Abstract
AbstractThis chapter moves forward regarding the number of sources of uncertainty that are considered in the valuation process. Drawing on the results in the previous chapter, we discuss how transforming a deterministic variable into a stochastic one affects both valuation and optimal exercise of the investment option. First we deal with a combined cycle gas turbine. Both the electricity price and natural gas price are governed by stochastic processes. We compute the net present value of investing in this plant; then we derive the value of the option to invest in it over the next 10 years. We check for the sensitivity of our results to changes in the capacity factor, the long-term electricity price, the correlation between the two prices, and their respective volatilities. The second case concerns a coal-fired station when coal price and electricity price evolve stochastically over time. In the two cases, numerical estimates of the underlying parameters have been computed from futures prices. Besides, the optimal boundary between the investment region and the continuation region in the input fuel/electricity output prices space is derived.KeywordsElectricity PriceCapacity FactorOutput PriceInvestment OptionCoal PriceThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.
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