Real Options Valuation Based on Certainty Equivalents
This purpose of this research is to identify appropriate rates to discount the flows from real options in situations in which the risk-free rate does not apply, in particular, in incomplete markets. A methodology is proposed for valuing real options based on certainty equivalence, which requires as...
| Main Authors: | , |
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| Format: | Article |
| Language: | English |
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Universidad EAFIT
2014-12-01
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| Series: | Ecos de Economía |
| Subjects: | |
| Online Access: | http://publicaciones.eafit.edu.co/index.php/ecos-economia/article/view/2706 |
| _version_ | 1818644310345646080 |
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| author | Cecilia Maya Ochoa Julián Pareja Vasseur |
| author_facet | Cecilia Maya Ochoa Julián Pareja Vasseur |
| author_sort | Cecilia Maya Ochoa |
| collection | DOAJ |
| description | This purpose of this research is to identify appropriate rates to discount the flows from real options in situations in which the risk-free rate does not apply, in particular, in incomplete markets. A methodology is proposed for valuing real options based on certainty equivalence, which requires as a principal condition the consideration of preferences represented with utility functions. A constant relative risk aversion (CRRA) utility function is used to represent these preferences. The results indicate that this methodology adequately reflects how the value of a real option changes in accordance with an investor´s preferences. |
| first_indexed | 2024-12-17T00:12:49Z |
| format | Article |
| id | doaj.art-840c89b1cd474ec5ba27b50fd9e1f347 |
| institution | Directory Open Access Journal |
| issn | 1657-4206 |
| language | English |
| last_indexed | 2024-12-17T00:12:49Z |
| publishDate | 2014-12-01 |
| publisher | Universidad EAFIT |
| record_format | Article |
| series | Ecos de Economía |
| spelling | doaj.art-840c89b1cd474ec5ba27b50fd9e1f3472022-12-21T22:10:47ZengUniversidad EAFITEcos de Economía1657-42062014-12-011839497110.17230/ecos.2014.39.32062Real Options Valuation Based on Certainty EquivalentsCecilia Maya Ochoa0Julián Pareja Vasseur1Operaciones Financieras XM S. A; Universidad EAFITUniversidad EAFITThis purpose of this research is to identify appropriate rates to discount the flows from real options in situations in which the risk-free rate does not apply, in particular, in incomplete markets. A methodology is proposed for valuing real options based on certainty equivalence, which requires as a principal condition the consideration of preferences represented with utility functions. A constant relative risk aversion (CRRA) utility function is used to represent these preferences. The results indicate that this methodology adequately reflects how the value of a real option changes in accordance with an investor´s preferences.http://publicaciones.eafit.edu.co/index.php/ecos-economia/article/view/2706opciones realesfunción de utilidadequivalentes de certezamercados incompletosCRRA |
| spellingShingle | Cecilia Maya Ochoa Julián Pareja Vasseur Real Options Valuation Based on Certainty Equivalents Ecos de Economía opciones reales función de utilidad equivalentes de certeza mercados incompletos CRRA |
| title | Real Options Valuation Based on Certainty Equivalents |
| title_full | Real Options Valuation Based on Certainty Equivalents |
| title_fullStr | Real Options Valuation Based on Certainty Equivalents |
| title_full_unstemmed | Real Options Valuation Based on Certainty Equivalents |
| title_short | Real Options Valuation Based on Certainty Equivalents |
| title_sort | real options valuation based on certainty equivalents |
| topic | opciones reales función de utilidad equivalentes de certeza mercados incompletos CRRA |
| url | http://publicaciones.eafit.edu.co/index.php/ecos-economia/article/view/2706 |
| work_keys_str_mv | AT ceciliamayaochoa realoptionsvaluationbasedoncertaintyequivalents AT julianparejavasseur realoptionsvaluationbasedoncertaintyequivalents |