Browse > Article

Applicability of the Real Option Valuation Method to the Economic Analysis of Water Resources Supply Projects  

Yu, Soon-Young (University of Waterloo, 200 University Aveneu West)
Unger, Andre J.A. (University of Waterloo, 200 University Aveneu West)
Kim, Tae-Hee (Korea Institute of Geoscience and Mineral Resources)
Publication Information
Economic and Environmental Geology / v.41, no.5, 2008 , pp. 551-562 More about this Journal
Abstract
Option pricing model in finance has been applied to price non-financial options, called real options. The real option valuation method is ideally suited to irreversible decision making under uncertainty, including the need to determine the optimal time to act and even change between alternative courses of action as information is collected. Therefore, the real option valuation method is expected to provide a superior and less subjective approach to determining optimal strategies for water resources supply projects, which have been reported to have huge risks due to uncertainties, and investors and policy makers need to build an optimal strategy - when and if to invest - with uncertainties and managerial flexibilities considered.
Keywords
real option; real option valuation method; water resources supply projects; uncertainties; managerial flexibilities;
Citations & Related Records
Times Cited By KSCI : 1  (Citation Analysis)
연도 인용수 순위
1 Bickerton, G.S. (2001) Optimal decision analysis for investments in municipal water-service infrastructure. Master's Thesis, University of Waterloo
2 Cortazar, G., Schwartz, E., and Salinas, M. (1998) Evaluating Environmental Investments: A Real Options Approach. Management science, v. 44, p. 1059-1070   DOI   ScienceOn
3 Forsyth, P.A. and Vetzal, K.R. (2002) Quadratic convergence of a penalty method for valuating American options. SIAM Journal on Scientific Computation, v. 23, p. 2096-2123
4 Lentz, G.H. and Maurice Tse, K.S. (1995) An Option Pricing Approach to the Valuation of Real Estate Contaminated with Hazardous Materials. Journal of Real Estate Finance and Economics, v. 10, p. 121-144   DOI
5 Marreco, J.d.M. and Carpio, L.G.T. (2006) Flexibility valuation in the Brazilian power system: A real options approach. Energy policy, v. 34, p. 3749-3756   DOI   ScienceOn
6 Seo, S.-T. (2006) A real options approach to the investment analysis of irrigation systems. Journal of Agricultural Economics, v. 47, p. 31-50
7 Sung, O.-H. (2002) Valuation of Two-Stage Technology Investment Using Double Real Option. Journal of Korea Technology Innovation Society, v. 5, p. 141-151
8 Wang, T. and de Neufville, R. (2004) Building real options into physical systems with stochastic mixed-integer programming. 8th Real Options Annual International Conference, Montreal, Canada, June 2004
9 Park, H. (2004) A Real Option Approach to Optimal Use of Natural Resource: Revisiting the Least Cost Principle. Korean Energy Economic Review, v. 3, p. 47-69
10 Murillas, A. and Chamorro, J.M. (2006) Valuation and Management of Fishing Resources Under Price Uncertainty. Environmental & resource economics, v. 33, p. 39-71   DOI
11 Lee, J.-D. (2005) The Application of Real Options Theory in Defense Offset Contract. Journal of Military Operations Research Society of Korea, v. 31, p. 14-25   과학기술학회마을
12 Brennan, M.J. and Schwartz, E.S. (1985) Evaluating natural resource investments. Journal of business, v. 58, p. 135-157   DOI   ScienceOn
13 Yu, S.-H. and Sung, W.-H. (2005) Real Option and Analysis of R&D Projects. Korea Institute of Science and Technology Information, 2005-12
14 Sung, O.-H. (2005) A Study on Interval Estimation of Technology R&D Investment Value using Black-Scholes Model. Journal of Korea Technology Innovation Society, v. 8, p. 29-50
15 Dimitrakopoulos, R.G. and Abdel Sabour, S.A. (2007) Evaluating mine plans under uncertainty: Can the real options make a difference?. Resources policy, v. 32, p. 116-125   DOI   ScienceOn
16 Chernov, M. and Ghysels, E. (1999) Estimation of stochastic volatility models for the purpose of option pricing. Proceedings of the Sixth International Conference on Computational Finance, Leonard N. Stem School of Business, January 6-8, 1999
17 Park, H. and Hwang, E.-S. (2003) Real option analysis for irreversible investment effect of farmland preservation programs. Journal of Agricultural Economics, v. 44, p. 121-139
18 Cho, S. and Heo, E. (2005) Real options valuation method for new and renewable energies: an empirical study of wind power. Proceedings of the Korean Society for New and Renewable Energy Conference, p. 604
19 Heo, E. (2000) Recent Developments on Economic Valuation Method - CVM, MAUA and Real Option Pricing. Journal of Korea Technology Innovation Society, v. 3, p. 37-54
20 Isik, M. (2004) Incentives for Technology Adoption Under Environmental Policy Uncertainty: Implications for Green Payment Programs. Environmental & resource economics, v.27, p.247-263   DOI   ScienceOn
21 Sung, O.-H. (2004) A study on Real option valuation for technology investment using the Monte Carlo simulation. Journal of Korea Technology Innovation Society, v. 7, p. 533-554
22 Black, F. and Sholes, M. (1973) The pricing of options and corporate liabilities. Journal of Political Economy, v. 81, p. 637-654   DOI   ScienceOn
23 Cortazar, G., Gravet, M., and Urzua, J. (2008) The valuation of multidimensional American real options using the LSM simulation method. Computers & operations research, v. 35, p. 113-129   DOI   ScienceOn
24 Park, H. (2005) Real Options on Firms' Environmental Investment in the Presence of Uncertainty on Tradable Emission Permit Price. Korean Economic Review, v. 53, p. 173-199
25 Choi, S.M. (2002) Try to Use a New Valuation Approach: Application of the Real Options Pricing Method to an Aerospace Project. Proceedings of the Korea Technology Innovation Society Conference, p. 181-198
26 Cvitanic, J. and Zapatero, F. (2004) Economics and Mathematics of Financial Markets.The MIT Press, London, p. 228-235
27 Insley, M. and Wirjanto, T. (2008) Contrasting two approaches in real options valuations: contingent claims versus dynamic programming. discussion paper, University of Waterloo, http://www.arts.uwaterloo.ca/-minsley/cclaims.pdf
28 Yang, M. and Blyth, W. (2007) Modeling Investment Risks and Uncertainties with Real Options Approach - A Working Paper for an IEA Book: Climate Policy Uncertainty and Investment Risk
29 Seol, S.S. and Yoo, C.S. (2002) Real Options for Practitioners on the Valuation of Technology and Investment. Journal of Korea Technology Innovation Society, v. 5, p. 44-58
30 Michailidis, A. and Mattas, K. (2007) Using Real Options Theory to Irrigation Dam Investment Analysis: An Application of Binomial Option Pricing Model. Water resources management, v. 21, p. 1717-1733   DOI
31 Kjaerland, F. (2007) A real option analysis of investments in hydropower-The case of Norway. Energy policy, v. 35, p. 5901-5908   DOI   ScienceOn
32 Insley, M. (2002) A Real Options Approach to the Valuation of a Forestry Investment. Journal of Environmental Economics and Management. v. 44, p. 471-492   DOI   ScienceOn
33 Forsyth, M. (2000) On estimating the Option Value of Preserving a Wilderness Area. Canadian Journal of Economics, v. 33, p. 413-434   DOI   ScienceOn
34 Lee, I.-S. and Heo, E. (2004) An Option Pricing Model for the Natural Resource Development Projects. Environmental and Resource Economics Review, v. 13, p. 735-761
35 Costa Lima, G.A. and Suslick, S.B. (2006) Estimation of volatility of selected oil production projects. Journal of petroleum science & engineering, v. 54, p. 129-139   DOI   ScienceOn
36 Seo, S. and W.S. (2007) Analysis of entry and exit thresholds for apple production: a real options approach. Journal of Agricultural Economics, v. 48, p. 93-113   DOI
37 Yun, W.-C. (2001) Evaluation of Capital Investment in Energy-related Business by using Real Option Rricing Method. Korea Energy Economics Institute. 2001-06
38 Insley, M. (2003) On the option to invest in pollution control under a regime of tradable emissions allowances. Canadian Journal of Economics, v. 35, p. 860-883
39 Dixit, A.K. and Pindyck, R.S. (1994) Investment under Uncertainty. Princeton University Press, New Jersey, p. 93-132
40 Jeon, I.H., Lee, J.D., and Jeong, J.W. (2005) Evaluation of Withdrawing and Reallocating the Existing Ananog Radio Broadcasting Spectrum by Using Real Option Valuation Method. Proceeding of the Korean Society for Innovation Management and Economics Conference, p. 124-139
41 Sunnevag, K. (1998) An option pricing approach to exploration licensing strategy. Resources policy, v. 24, p. 25-38   DOI   ScienceOn
42 Seo, S., Segarra, E., and Mitchell, P.D. (2008) Irrigation technology adoption and its implication for water conservation in the Texas High Plains: a real options approach. Agricultural economics, v. 38, p. 47-55   DOI   ScienceOn
43 Park, J.M. and Seol, S.S. (2006) A Comparative Study on the Real Options Valuation of Biotechnology R&D. Journal of Korea Technology Innovation Society, v. 9, p. 84-102