Segol, G (1990) An option pricing model with three stochastic variables and its application to risky projects. PhD thesis, Golden Gate University, USA.
Abstract
An option-pricing model with three stochastic variables is formulated to represent the problem, faced by an electric utility, of continuing the construction of a partially completed nuclear power plant, or converting it to a fossil-fuel plant. The three stochastic variables in this case are the operating costs of the nuclear and the fossil-fuel facilities, and the remaining construction cost. A numerical solution of the resulting three-dimensional partial differential equation is obtained using the Hopscotch algorithm, and applied to a typical construction project, using reasonable values (industry averages) as input data. This research extends the works of Brennan and Schwartz;$\sp1$ Paddock, Siegel, and Smith;$\sp2$ McDonald and Siegel;$\sp3$ and Majd and Pindyck,$\sp4$ who demonstrated the merits of the option-pricing methodology for capital budgeting. ftn$\sp1$Michael J. Brennan and Eduardo S. Schwartz, "Evaluating Natural Resource Investments," Journal of Business 58, no. 2 (1985):135-57. $\sp2$James L. Paddock, Daniel R. Siegel, and James L. Smith, "Option Valuation of Claims on Real Assets: The Case of Offshore Petroleum Leases," Working paper MIT-EL 83-005WP (revised), Massachusetts Institute of Technology, September 1987. $\sp3$Robert L. McDonald and Daniel R. Siegel, "The Value of Waiting to Invest," Quarterly Journal of Economics 101 (November 1986):707-27. $\sp4$Saman Majd and Robert S. Pindyck, "Time to Build, Option Value, and Investment Decisions," Journal of Financial Economics 18 (1987):7-27.
| Item Type: | Thesis (Doctoral) |
|---|---|
| Uncontrolled Keywords: | budgeting; capital budgeting; construction cost; investment; nuclear power; pricing |
| Index terms: | investment decision, option, electric utility, operating cost, partial differential equation, natural resource, construction cost, capital budgeting, pricing, lease, methodology, construction project, budgeting, journal, nuclear power |
| Subjects: | environmental resource management, economic analysis, research dissemination and communication, budgeting, research methods, land economics, production management, financial and cost management, energy systems, mathematical modelling, decision analysis, financial management |
| Topics: | Urban Studies, Research Practice, Cost Management, Business Strategy, Sustainability, Risk Management, Project Management, Engineering Principles |
| Descriptive scope: | 4 PCTA |
N.B. Descriptive scope is a count of how many of the five facets of empirical research are indicated by the words used in title, abstract and keywords. It is not intended as a judgement on the research; merely a count of the kind of word we would expect to indicate Phenomenon, Concepts, Theoretical framing, Empirical techniques, Analytical techniques. If all five are present, then a code of “5 PCTEA” will indicate this. If you feel the coding for this record is questionable, we welcome discussion around the terms we matched or the way we categorized them. The facet you would expect may not be coded, or a facet may be coded inappropriately. This can also bear on a larger question, of which facets should be treated as defining in construction management research. Please get in touch, and we will look at it. More details here