Cash Flow at Risk (CFaR) can be controlled using real options. In this normative paper, we derive numerically a univariate discrete time model, extension of (Kulatilaka, 1988), the expanded Net Present Value (NPV) of an industrial investment and simultaneously state variable thresholds to optimally exercise real options for the whole life of the project. In this framework, we model total variability in expanded NPV using a Markov chain Monte Carlo method. A number of original results are derived for an all equity financed firm. Cash flow distribution and CFaR is used for each epoch in the life of the project. A VaR for the expanded NPV at time 0 is derived. These new methods have been applied to two case studies in shipping finance, namely a Very Large Crude Carrier and a Panamax.
Controlling CfaR with Real Options
ALESII, GIUSEPPE
2006-01-01
Abstract
Cash Flow at Risk (CFaR) can be controlled using real options. In this normative paper, we derive numerically a univariate discrete time model, extension of (Kulatilaka, 1988), the expanded Net Present Value (NPV) of an industrial investment and simultaneously state variable thresholds to optimally exercise real options for the whole life of the project. In this framework, we model total variability in expanded NPV using a Markov chain Monte Carlo method. A number of original results are derived for an all equity financed firm. Cash flow distribution and CFaR is used for each epoch in the life of the project. A VaR for the expanded NPV at time 0 is derived. These new methods have been applied to two case studies in shipping finance, namely a Very Large Crude Carrier and a Panamax.Pubblicazioni consigliate
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