optimal investments in power generation under centralized and decentralized decision making this work presents a novel model for optimization of investments in new power generation under uncertainty the model can calculate optimal investment strategies under both centralized social welfare and decentralized profit objectives the power market is represented with linear supply and demand curves a stochastic dynamic programming algorithm is used to solve the investment problem where uncertainty in demand is represented as a discrete markov chain the stochastic dynamic model allows us to evaluate investment projects in new base and peak load power generation as real options and determine optimal timing of the investments in a case study we use the model to compare optimal investment strategies under centralized and decentralized decision making a number of interesting results follow by varying the assumptions about market structure and price response on the demand side

real option valuation of power transmission investments by stochastic simulation abstract network expansions in power markets usually lead to investment decisions subject to substantial irreversibility and uncertainty hence investors need valuing the flexibility to change decisions as uncertainty unfolds progressively real option analysis is an advanced valuation technique that enables planners to take advantage of market opportunities while preventing or mitigating losses if future conditions evolve unfavorably in the past many approaches for valuing real options have been developed however applying these methods to value transmission projects is often inappropriate as revenue cash flows are path dependent and affected by a myriad of uncertain variables in this work a valuation technique based on stochastic simulation and recursive dynamic programming called least square monte carlo is applied to properly value the deferral option in a transmission investment the effect of option s maturity the initial outlay and the capital cost upon the value of the postponement option is investigated finally sensitivity analysis determines optimal decision regions to execute postpone or reject the investment projects

allowance trading and energy consumption under a personal carbon trading scheme a dynamic programming approach abstract in response to the challenge of climate change personal carbon trading was put forward as a policy instrument to promote low carbon behavior in the household sector to evaluate the effectiveness of this scheme it is important to gain insight into the allowance trading and energy consumption behavior in a long emission commitment period this paper proposes a dynamic programming model to investigate allowance trading and energy consumption a main feature of the model is its consideration of allowance banking and borrowing activities ten simulated scenarios with different allowance prices price volatility and carbon emission rates are discussed the findings show that consumers would trade more actively when allowance price is volatile it is also found that energy consumption and allowance trading will decrease when the carbon emission rate increases overall the analysis in this paper implies that personal carbon trading scheme would be an effective policy measure to change consumers behavior therefore it would be valuable for decision makers to consider the introduction and implementation of this scheme

fund loyalty among socially responsible investors the importance of the economic and ethical domains the corporate social responsibility literature has emphasized the importance of both economic and ethical domains of corporate behavior analyzing unprecedented survey data from investors in a socially responsible sr mutual fund this article considers how economic and ethical concerns shape shareholder investment behavior in particular this article analyzes levels of investor fund loyalty defined as the continued investment in a mutual fund despite the belief that one is earning a lower return on investment building upon existing research that shows sr fund assets are more stable than conventional fund assets this article leverages within respondent comparisons to clarify that dual investors i e those who invest in both sr and conventional funds are more loyal to their sr fund than to their conventional fund this suggests that a corporation s ethical behavior attracts more patient investment capital an important consideration for any corporation that is deciding to what degree it should engage in corporate social responsibility in addition this article empirically demonstrates that economic motivations reduce sr fund loyalty and that ethical motivations induce sr fund loyalty this evidence that ethical motivation is associated with fund loyalty advances research on morality in the market by yielding empirical evidence to a largely theoretical debate

the pricing of options on assets with stochastic volatilities one option pricing problem that has hitherto been unsolved is the pricing of a european call on an asset that has a stochastic volatility this paper examines this problem the option price is determined in series form for the case in which the stochastic volatility is independent of the stock price numerical solutions are also produced for the case in which the volatility is correlated with the stock price it is found that the black scholes price frequently overprices options and that the degree of overpricing increases with the time to maturity one option pricing problem that has hitherto remained unsolved is the pricing of a european call on a stock that has a stochastic volatility from the work of merton 12 garman 6 and cox ingersoll and ross 3 the differential equation that the option must satisfy is known the solution of this differential equation is independent of risk preferences if a the volatility is a traded asset or b the volatility is uncorrelated with aggregate consumption if either of these conditions holds the risk neutral valuation arguments of cox and ross 4 can be used in a straightfoward way this paper produces a solution in series form for the situation in which the stock price is instantaneously uncorrelated with the volatility we do not assume that the volatility is a traded asset also a constant correlation between the instantaneous rate of change of the volatility and the rate of change of aggregate consumption can be accommodated the option price is lower than the blackscholes b s 1 price when the option is close to being at the money and higher when it is deep in or deep out of the money the exercise prices for which overpricing by b s takes place are within about ten percent of the security price this is the range of exercise prices over which most option trading takes place so we may in general expect the b s price to overprice options this effect is exaggerated as the time to maturity increases one of the most surprising implications of this is that if the b s equation is used to determine the implied volatility of a near the money option the longer the time to maturity the lower the implied volatility numerical solutions for the case in which the volatility is correlated with the stock price are also examined the stochastic volatility problem has been examined by merton 13 geske 7 johnson 10 johnson and shanno 11 eisenberg 5 wiggins 16 and

a unified approach to bermudan and barrier options under stochastic volatility models with jumps abstract many financial assets such as currencies commodities and equity stocks exhibit both jumps and stochastic volatility which are especially prominent in the market after the financial crisis some strategic decision making problems also involve american style options in this paper we develop a novel fast and accurate method for pricing american and barrier options in regime switching jump diffusion models by blending regime switching models and markov chain approximation techniques in the fourier domain we provide a unified approach to price bermudan american options and barrier options under general stochastic volatility models with jumps the models considered include heston hull white stein stein scott the 3 2 model and the recently proposed 4 2 model and the hypergeometric model with general jump amplitude distributions in the return process applications include the valuation of discretely monitored contracts as well as continuously monitored contracts common in the foreign exchange markets numerical results are provided to demonstrate the accuracy and efficiency of the proposed method

evaluating natural resource investments notwithstanding impressive advances in the theory of finance over the past 2 decades practical procedures for capital budgeting have evolved only slowly the standard technique which has remained unchanged in essentials since it was originally proposed see dean 1951 bierman and smidt 1960 derives from a simple adaptation of the fisher 1907 model of valuation under certainty under this technique expected cash flows from an investment project are discounted at a rate deemed appropriate to their risk and the resulting present value is compared with the cost of the project this standard textbook technique reflects modern theoretical developments only insofar as estimates of the discount rate may be obtained from crude application of single period asset pricing theory but see brennan 1973 bogue and roll 1974 turnbull 1977 constantinides 1978 the inadequacy of this approach to capital budgeting is widely acknowledged although not widely discussed its obvious deficiency is its the evaluation of mining and other natural resource projects is made particularly difficult by the high degree of uncertainty attaching to output prices it is shown that the techniques of continuous time arbitrage and stochastic control theory may be used not only to value such projects but also to determine the optimal policies for developing managing and abandoning them the approach may be adapted to a wide variety of contexts outside the natural resource sector where uncertainty about future project revenues is a paramount concern

the american put option valued analytically an analytic solution to the american put problem is derived herein the hedge ratio and other derivatives of the solution are presented the formula derived implies an exact duplicating portfolio for the american put consisting of discount bonds and stock sold short the formula is extended to consider put options on stocks paying cash dividends a polynomial expression is developed for evaluating these formulae values and hedge ratios for puts on both dividend and nondividend paying stocks are calculated tabulated and compared with values derived by numerical integration and binomial approximation as with european options evaluating an analytic formula is more efficient than approximating the stock price process or the partial differential equation by binomial or finite difference methods finally applications of this american put solution are discussed

energy investment risk assessment for nations along china s belt road initiative abstract overseas energy investment as an effective way of securing energy supply is being favored by the world s leading energy consuming countries however energy investment has the potential high risk on multiple forms including political and regulatory risk currency liquidity and refinancing risk as well as resource risk and so on to effectively evaluate overseas energy investment risk this study proposed a new indicator system from six dimensions furthermore a fuzzy integrated evaluation model based on the entropy weight was constructed to rate the energy investment risk for 50 nations along china s belt road initiative the findings indicate that resource potential and chinese factors have become the main determinant of energy investment risk while environmental constraints and political risk should also be considered for investing decisions in conclusion saudi arabia united arab emirates pakistan kazakhstan and russia are the most ideal choices for china s energy investment balancing resource potential and investment environment

a dynamic programming procedure for pricing american style asian options pricing european style asian options based on the arithmetic average under the black and scholes model involves estimating an integral a mathematical expectation for which no easily computable analytical solution is available pricing their american style counterparts which provide early exercise opportunities poses the additional difficulty of solving a dynamic optimization problem to determine the optimal exercise strategy a procedure for pricing american style asian options of the bermudan flavor based on dynamic programming combined with finite element piecewise polynomial approximation of the value function is developed here a convergence proof is provided numerical experiments illustrate the consistency and efficiency of the procedure theoretical properties of the value function and of the optimal exercise strategy are also established

a century of research on agricultural markets this article provides a perspective on major innovations in research on agricultural markets over the past century we review research on market structure and performance vertical coordination arrangements and institutions for producer collective action contributions to empirical modeling of agricultural price determination and marketing margins are also evaluated as are innovations in research on spatial market relationships and the role of storage finally we discuss contributions to understanding market information systems and the functioning of market based mechanisms for agri

insights on the effect of land use choice the perpetual option on the best of two underlying assets abstract we consider the effect of land use choice on speculative land value and on development timing as reflected in the optimal hurdle ratio which triggers immediate development we find that land use choice i e multiple use zoning may add over 40 to land value under typical economic circumstances the conditions for optimal development of the land become markedly more difficult to achieve higher hurdle ratio required when the two land uses have similar values indeed a rational indecision result obtains in theory development will never occur when the two land use choices have equal value

pricing american style derivatives with european call options we present a new approach to pricing american style derivatives that is applicable to any markovian setting i e not limited to geometric brownian motion for which european call option prices are readily available by approximating the value function with an appropriately chosen interpolation function the pricing of an american style derivative with arbitrary payoff function is converted to the pricing of a portfolio of european call options leading to analytical expressions for those cases where analytical european call prices are available e g the merton jump diffusion process furthermore in many settings the approach yields upper and lower analytical bounds that provably converge to the true option price we provide computational results to illustrate the convergence and accuracy of the resulting estimators

monte carlo methods for security pricing the monte carlo approach has proved to be a valuable and flexible computational tool in modern finance this paper discusses some of the recent applications of the monte carlo method to security pricing problems with emphasis on improvements in efficiency we first review some variance reduction methods that have proved useful in finance then we describe the use of deterministic low discrepancy sequences also known as quasi monte carlo methods for the valuation of complex derivative securities we summarize some recent applications of the monte carlo method to the estimation of partial derivatives or risk sensitivities and to the valuation of american options we conclude by mentioning other applications

valuing flexibility as a complex option this paper develops an approach for valuing flexible production systems using contingent claims pricing demand curves for our model s underlying assets output products may be downward sloping in contrast with the standard option pricing assumption also our marginal production exercise costs may be increasing in addition we allow for multiple products and a production capacity constraint these elements of the model result in complex exercise decisions for the contingent claims which comprise the production system s value we illustrate our approach by valuing a flexible system that produces two products which have profit margin functions with stochastic parameters

valuation of adjustable rate mortgages with automatic stretching maturity abstract in hong kong 35 of residential mortgage loans are adjustable rate mortgages with variable tenor vrt that is with a change in interest rates the loan adjusts its maturity and principal payment such that the monthly installment remains the same in other words instead of bearing a volatility on monthly payments as in a fixed tenor variable payment vrp mortgage vrt mortgagors bear interest rate risk by bearing a tenor risk in this paper we analyze the valuation of this type of mortgages and the results are compared with the conventional vrp mortgages we find vrt loans are less expensive from a borrower s perspective than vrp loans but the difference between the loans becomes less significant if a tenor cap is added to the vrt loan

real investment options with multiple sources of rare events abstract we value real investment options when the underlying asset follows a mixed jump diffusion process involving various types sources of rare events jumps these jumps are assumed independent of each other with each type having a log normally distributed jump size and a random poisson distributed arrival time they may represent uncertainties about the arrival and impact on the underlying investment of new information concerning technological innovation competition political risk regulatory effects and other sources an analytic solution is presented for european claims call or put options with multiple sources of jumps a discrete time markov chain methodology implemented within a finite difference scheme is proposed for the valuation of american as well as european options the approach is also applicable to financial options with multiple types of rare events the approach is illustrated through valuing complex real options with compound features involving interactions between optimal investment and subsequent operating decisions specifically we value a growth option and an extension option

integrating real options analysis with long term electricity market models abstract in liberalized electricity markets the investment postponement option is deemed decisive for understanding the addition of new generating capacity basically it refers to the possibility for investors to postpone projects for a period while waiting for the arrival of new and better information about the market evolution when such development involves major uncertainties the generation business becomes riskier and the investors wait and see behavior might limit the timely addition of new power plants in that sense the literature provides solid empirical evidence about the occurrence of construction cycles in the deregulated electricity industry however the strategic flexibility inherent to the option to defer new power plants has not yet been rigorously incorporated to investment signals in existing market models therefore this paper proposes a novel methodology to assess the long term development of liberalized power markets based on a more realistic approach for valuing generation investments the work is based on a stochastic dynamic market model built upon system dynamics simulation approach the decision making framework considers that the addition of new capacity is driven by the economic value of the strategic flexibility associated with deferring investments under uncertainties thus the value of the postponement option is quantified in monetary terms through real options analysis simulations confirm the cyclical behavior of the energy only market in the long run as suggested by the empirical evidence found in the literature in addition sensitivity analysis regarding some relevant exogenous variables depicts an even more fluctuating evolution of the capacity due to the combination of strong demand growth rates with large volatilities finally the model validity is assessed through a formal procedure according to the scope of system dynamics modeling approach

the effects of crop yield insurance designs on farmer participation and welfare the performance of individual farm yield and area yield crop insurance programs is evaluated for a representative iowa corn farm using numerical optimization of expected utility and simulation techniques several different contract design features are studied including the nature of the yield index which triggers insurance payouts alternative restrictions on coverage levels and alternative pricing structures performance is evaluated in terms of impacts on farmer participation and welfare and is examined in a portfolio setting where futures and options are also available to farmers the relative performance of different crop insurance designs is found to be particularly sensitive to restrictions on coverage levels the size of premium loadings and the degree to which individual farm yields are correlated with area yields

multinomial approximating models for options with k state variables contingent claims whose values depend on multiple sources of uncertainty arise in many financial contracts and in the analysis of real projects unfortunately closed form solutions for these options are rare and numerical methods can be computationally expensive this article extends the literature on multinomial approximating models specifically new multinomial models are presented that include as special cases existing models the more general models are shown to be computationally more efficient

pricing american style securities using simulation abstract we develop a simulation algorithm for estimating the prices of american style securities i e securities with opportunities for early exercise our algorithm provides both point estimates and error bounds for the true security price it generates two estimates one biased high and one biased low both asymptotically unbiased and converging to the true price combining the two estimators yields a confidence interval for the true price the proposed algorithm is especially attractive compared with lattice and finite difference methods when there are multiple state variables and a small number of exercise opportunities preliminary computational evidence is given

continuous time methods in finance a review and an assessment i survey and assess the development of continuous time methods in finance during the last 30 years the subperiod 1969 to 1980 saw a dizzying pace of development with seminal ideas in derivatives securities pricing term structure theory asset pricing and optimal consumption and portfolio choices during the period 1981 to 1999 the theory has been extended and modified to better explain empirical regularities in various subfields of finance this latter subperiod has seen significant progress in econometric theory computational and estimation methods to test and implement continuous time models capital market frictions and bargaining issues are being increasingly incorporated in continuous time theory the roots of modern continuous time methods in finance can be traced back to the seminal contributions of merton 1969 1971 1973b in the late 1960s and early 1970s merton 1969 pioneered the use of continuous time modeling in financial economics by formulating the intertemporal consumption and portfolio choice problem of an investor in a stochastic dynamic programming setting merton 1973b also showed how such a framework can be used to develop equilibrium asset pricing implications thereby significantly extending the asset pricing theory to richer dynamic settings and expanding the scope of applications of continuous time methods to study problems in financial economics 1 within a span of about 30 years from the publication of merton s inf luential papers continuous time methods have become an integral part of financial economics indeed in certain core areas in finance such as e g asset pricing derivatives valuation term structure theory and portfolio selection continuoustime methods have proved to be the most attractive way to conduct research and gain economic intuition the continuous time approach in these areas has produced models with a rich variety of testable implications the econometric theory for testing continuous time models has made rapid strides in the last decade and has thus kept pace with the impressive progress on the theoretical front one hopes that the actual empirical investigations and estimation using the new procedures will follow suit soon

monte carlo valuation of american options through computation of the optimal exercise frontier this paper introduces a monte carlo simulation method for pricing multidimensional american options based on the computation of the optimal exercise frontier we consider bermudan options that can be exercised at a finite number of times and compute the optimal exercise frontier recursively we show that for every date of possible exercise any single point of the optimal exercise frontier is a fixed point of a simple algorithm once the frontier is computed we use plain vanilla monte carlo simulation to price the option and obtain a low biased estimator we illustrate the method with applications to several types of options

a real options model for renewable energy investment with application to solar photovoltaic power generation in china this paper proposes a real options model for evaluating renewable energy investment by considering uncertain factors such as co2 price non renewable energy cost investment cost and market price of electricity a phase out mechanism is built into the model to reflect the long term changes of subsidy policy we apply the proposed model to empirically evaluate the investment value and optimal timing for solar photovoltaic power generation in china our empirical results show that the current investment environment in china may not be able to attract immediate investment while the development of carbon market helps advance the optimal investment time a sensitivity analysis is conducted to investigate the dynamics of investment value and optimal timing under the changes of unit generating capacity subsidy level market price of electricity co2 price and investment cost it is found that the high investment cost and the volatility of electricity and co2 prices are not conducive to attract immediate investment instead increasing the level of subsidy promoting technological progress and maintaining the stability of market are useful to stimulate investment

simple binomial processes as diffusion approximations in financial models a binomial approximation to a diffusion is defined as computationally simple if the number of nodes grows at most linearly in the number of time intervals it is shown how to construct computationally simple binomial processes that converge weakly to commonly employed diffusions in financial models the convergence of the sequence of bond and european option prices from these processes to the corresponding values in the diffusion limit is also demonstrated numerical examples from the constant elasticity of variance stock price and the cox ingersoll and ross 1985 discount bond price are provided article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

macro determinants of volatility and volatility spillover in energy markets abstract we analyze the time varying volatility and spillover effects in crude oil heating oil and natural gas futures markets by incorporating changes in important macroeconomic variables and major political and weather related events into the conditional variance equations we allow asymmetric responses to random disturbances in each market as well as to good and bad economic news related to the overall economy results show the presence of asymmetric effects in both random disturbances and macroeconomic variables a bidirectional volatility spillover effect is found between natural gas and crude oil and between the natural gas and heating oil markets crude oil volatility is found to increase following major political financial and natural events seasonality and day of the week effects are found in the crude oil and heating oil markets

option pricing under garch processes using pde methods in this paper we propose a partial differential equation formulation for the value of an option when the underlying asset price is described by a discrete time garch process our numerical approach involves a spectral fourier chebyshev interpolation numerical illustrations are provided and the results are compared with other available valuation methods our numerical procedure converges exponentially fast and allows for the efficient computation of option prices achieving a high level of precision in a few seconds of computing time

pricing and exercising american options an asymptotic expansion approach abstract this paper proposes and implements a novel asymptotic expansion approach for pricing discretely monitored american options and approximating their optimal early exercise boundaries under a generic class of multivariate derivative pricing models incorporating both stochastic volatility and levy driven jumps in asset return the price and the critical value can be expanded up to any arbitrary order around those under a simple constant volatility jump diffusion model the expansion terms are then efficiently implemented by exactly solving some backward inductions via closed form fourier transforms where a substantial extension of the hilbert transform method of feng and linetsky 2008a 2009 plays an important role the efficiency of our method is illustrated through some representative examples as applications we analyze the impacts of various model parameters on the optimal early exercise boundary compare the optimal early exercise boundaries under different models and propose a derivative proxy based method for practically exercising american options under models with stochastic volatility and jumps

information asymmetry and socially responsible investment selecting applying and reporting on investment screens for socially responsible investing sri presents challenges for companies investors and fund managers this article seeks to clarify the nature of these challenges in developing an understanding of the foundations of ethical investment screens at a conceptual level this work argues that there is a common element to the ethical foundations of sri even with very different apparent motivations and investment restrictions establishing this commonality assists in explaining the information asymmetry problem inherent in sri a market facilitated solution illustrates how these insights might foster the development of socially responsible investment

a moving boundary approach to american option pricing this paper describes a method to solve the free boundary problem that arises in the pricing of american options most numerical methods for american option pricing exploit the representation of the option price as the expected pay off under the risk neutral measure and calculate the price for a given time to expiration and stock price they do not solve the related free boundary problem explicitly the advantage of solving the free boundary problem is that it provides the entire price function as well as the optimal exercise boundary explicitly our approach which we term the moving boundary approach is based on using a boundary guess and the value associated with the guess to construct an improved boundary it is also shown that on iteration the sequence of boundaries converge monotonically to the optimal exercise boundary examples illustrating the convergence behavior as well as discussions providing insight into the method are also presented finally we compare runtimes and speeds with other methods that solve the free boundary problem and compute the optimal boundaries explicitly like the front fixing method penalty method method based on the integral representations and the method by brennan and schwartz 1977 the valuation of american put options journal of finance 32 2 449 462

optimal design of subsidy to stimulate renewable energy investments the case of china this paper proposes a real options model for estimating the optimal subsidy for renewable energy power generation project by using stochastic process to describe the market price of electricity co2 price and investment cost two indicators i e project value and threshold value are used to derive the optimal subsidy the least squares monte carlo simulation method is used to solve the model the proposed model is used to empirically evaluate the optimal level of subsidy for solar photovoltaic power generation in china the results show that carbon emission trading scheme helps reduce subsidy unit generating capacity market price of electricity co2 price and the volatility of investment cost are negatively related with subsidy whereas investment cost and the volatility of electricity price and co2 price are positively related with subsidy it is suggested that chinese governments take some measures e g promoting technological progress establishing a nationwide carbon emission trading market promoting the competition in renewable energy industry as well as maintaining the stability of co2 price and electricity price to reduce the required subsidy

what is the value of the option to defer an investment in transmission expansion planning an estimation using real options abstract in deregulated markets transmission expansion planning tep is usually performed by a central network planner seeking to maximize social welfare in doing that the network planner commonly follows a traditional project valuation considering a discounted cash flow dcf methodology although incorporating uncertainty and reliability considerations accordingly once the optimal transmission expansion plan is determined the network planner frequently auctions the needed investments obligating the investor to execute the expansion in the fixed inflexible terms defined in the bidding process a key problem is that dcf does not take into account the responses of the planner when uncertainties are resolved because dcf evaluates the project with the information available today in tep managerial flexibility may be valuable because optimal decisions may change over time with the release of new information transmission investors may want to defer or expand according to such information the aim of this article is to estimate the value of adding some flexibility in tep through real options in particular by means of using a real option approach with binomial trees we study the benefits for a social network planner of having the option to defer some transmission investments our results suggest that incorporating flexibility in tep may increase social welfare

pricing foreign currency options under stochastic interest rates abstract in this paper we build a general framework to price contingent claims on foreign currencies using the heath et al 1987 model of the term structure closed form solutions are obtained for european options on currencies and currency futures assuming that the volatility functions determining the term structure are deterministic as such this paper provides an example of a bond price process for both the domestic and foreign economies consistent with grabbe s 1983 formulation of the same problem

pricing weather derivatives this article presents a general method for pricing weather derivatives specification tests find that a temperature series for fresno ca follows a mean reverting brownian motion process with discrete jumps and autoregressive conditional heteroscedastic errors based on this process we define an equilibrium pricing model for cooling degree day weather options comparing option prices estimated with three methods a traditional burn rate approach a black scholes merton approximation and an equilibrium monte carlo simulation reveals significant differences equilibrium prices are preferred on theoretical grounds so are used to demonstrate the usefulness of weather derivatives as risk management tools for california specialty crop growers

the planting real option in cash rent valuation after entering into a farmland cash rent contract in the fall a tenant farmer has flexibility over the spring crop choice and the input application level failure to account for these options will bias estimates of what farmers should pay to rent land applying monte carlo simulation methods this study investigates the option values for these choices a multivariate gaussian copula mgc is employed to account for dependence among yields and prices results show that the average cash rent valuation for the real option approach is 33 6 higher than that for the conventional net present value npv method in which the input intensity option is 0 9 crop planting sequence is shown to impact the real option value

low or no subsidy proposing a regional power grid based wind power feed in tariff benchmark price mechanism in china abstract the chinese government plans to adopt a low or no subsidy policy mechanism on renewable energy power development in the future to achieve a balance between reducing financial burden on the government and ensuring profitability of investors as well as to account for the regional differences in china a novel regional wind power grid feed in tariff benchmark price mechanism by net present value npv method and real option ro method is proposed in this paper the results voice support on the appropriateness of gradually decreasing the wind feed in tariff fit benchmark price to as low as the coal fired fit the proposed fit price level is presented as a price range on the basis of a guaranteed internal rate of return irr falls in between 8 to 15 for wind power investors the results indicate that the current fit price should be readjusted and redistributed although the fit price in central and south china grids is recommended to be relatively high the npv of wind farm project value in six regional grids are at the same level

keeping ethical investment ethical regulatory issues for investing for sustainability regulation must target the financial sector which often funds and profits from environmentally unsustainable development in an era of global financial markets the financial sector has a crucial impact on the state of the environment the long standing movement for ethically and socially responsible investment sri has recently begun to advocate environmental standards for financiers while this movement is gaining more adherents it has increasingly justified responsible financing as a path to be prosperous rather than virtuous this trend partly owes to how financial institutions view their legal responsibilities the business case motivations that now predominantly drive sri are not sufficient to make the financial sector a means to sustainable development some modest legal reforms to improve the quality and extent of sri have yet to make a tangible difference a more ambitious strategy to promote sri for environmental sustainability is possible based on reforming the fiduciary duties of financial institutions such duties tied to concrete performance standards could make financiers invest in more ethically responsible ways other collateral reforms to financial markets including improved corporate environmental reporting are required to promote sustainability

designing regulatory frameworks for merchant transmission investments by real options analysis in deregulated electricity markets the transmission network is a key infrastructure for enabling competition in the generation sector a deficient expansion of the transmission grid prevents the realization of the benefits in terms of efficiency associated with market mechanisms consequently it is essential to provide clear investment policies and economic signals to attract timely and efficient transmission investments in order to develop the system at minimum cost meeting the requirements of generators and consumers while keeping adequate levels of service quality and reliability this paper proposes a modern tool of economic evaluation based on real options analysis that provides the regulator the ability to assess various incentives that would lead transmission investors to make efficient decisions in highly uncertain environments real options properly values partially irreversible investment decisions such as to defer modify or abandon an investment project in response to the arrival of new information or as uncertainties are resolved decisions are evaluated from the point of view of a transmission investor trying to maximize its own profits in the time period set to recover the capital invested the results allow the study of the behavior of transmission investors regarding their decision making when they have the possibility to manage the option to defer under different regulatory schemes that encourage the expansion of the transmission system

optimal exercise policies and simulation based valuation for american asian options american asian options are average price options that allow early exercise in this paper we derive structural properties for the optimal exercise policy which are then used to develop an efficient numerical algorithm for pricing such options in particular we show that the optimal policy is a threshold policy the option should be exercised as soon as the average asset price reaches a characterized threshold which can be written as a function of the asset price at that time by exploiting this and other structural properties we are able to parameterize the exercise boundary and derive gradient estimators for the option payoff with respect to the parameters of the model these estimators are then incorporated into a simulation based algorithm to price american asian options computational experiments carried out indicate that the algorithm is very competitive with other recently proposed numerical algorithms

american options under stochastic volatility the problem of pricing an american option written on an underlying asset with constant price volatility has been studied extensively in literature real world data however demonstrate that volatility is not constant and stochastic volatility models are used to account for dynamic volatility changes option pricing methods that have been developed in literature for pricing under stochastic volatility focus mostly on european options we consider the problem of pricing american options under stochastic volatility which has had relatively much less attention from literature first we develop a transformation procedure to compute the optimal exercise policy and option price and provide theoretical guarantees for convergence second using this computational tool we explore a variety of questions that seek insights into the dependence of option prices exercise policies and implied volatilities on the market price of volatility risk and correlation between the asset and stochastic volatility the speed and accuracy of the procedure are compared against existing methods as well

optimal oil production and the world supply of oil abstract we study the optimal oil extraction strategy and the value of an oil field using a multiple real option approach the numerical method is flexible enough to solve a model with several state variables to discuss the effect of risk aversion and to take into account uncertainty in the size of reserves optimal extraction in the baseline model is found to be volatile if the oil producer is risk averse production is more stable but spare capacity is much higher than what is typically observed we show that decisions are very sensitive to expectations on the equilibrium oil price using a mean reverting model of the oil price where the equilibrium price is also a random variable oil production was cut during the 2008 2009 crisis and we find that the cut in production was larger for opec members for countries facing a lower discount rate and for countries whose governments finances are less dependent on oil revenues however the net present value of a country s oil reserves would be increased significantly by 100 in the most extreme case if production was cut completely when prices fall below the country s threshold price if several producers were to adopt such strategies world oil prices would be higher but more stable

one factor interest rate models and the valuation of interest rate derivative securities this paper compares different approaches to developing arbitrage free models of the term structure it presents a numerical procedure that can be used to construct a wide range of one factor models of the short rate that are both markov and consistent with the initial term structure of interest rates

pricing commodity options when the underlying futures price exhibits time varying volatility standard commodity option pricing models assume proportional changes in the underlying futures price are i i d normal empirical evidence suggests commodity futures price movements exhibit excess kurtosis and time varying volatility this paper presents option pricing models when time varying volatility and excess kurtosis in the underlying futures price can be modeled as a garch process empirical results suggest that the garch option pricing model outperforms the standard black option pricing model which uses historical volatilities a closed form approximation model using a variance forecast generated from the estimated garch process also outperforms black s model and in many cases the general garch model as well

valuing investment decisions of renewable energy projects considering changing volatility abstract volatility is an important parameter when evaluating investments using the real options method for renewable energy investments the volatility of cash flow continuously changes because as new information and knowledge are gathered there is less foreseen variation this paper proposes an extended recombining trinomial tree model where the changing volatility is used to generate transition probabilities the changing volatility is generated using a consolidation process where multiple random variables including the market price of electricity carbon price and lending rate are integrated into a low dimension stochastic process a two factor learning curve is used to model the changes of investment cost we apply the proposed model to analyze solar photovoltaic pv power generation investment in china the results show volatility with changing feature compared with constant volatility changing volatility may advance investment decisions and change the project value complete grid parity policy in the solar pv industry is infeasible because the opportunity cost brought by the option of delaying cannot be offset the changing volatility may produce a lower and equally effective subsidy level compared with constant volatility a carbon emission trading scheme is helpful in advancing investments in renewable energy which is reflected in improvements in project value advancements in investment decisions and reductions in the required subsidy level

short and long run determinants of commodity price volatility to explain price volatility in the u s agricultural energy and metal futures markets we estimate a model of common and commodity specific high and low frequency factors by building on the spline garch model of engle and rangel 2008 a better model fit results from allowing the unconditional variance to slowly change over time moreover the persistence of volatility shocks is shown to be much weaker than what standard garch models imply combining the volatility results with monthly macroeconomic indicator data we find that decomposing realized volatility into high and low frequency components better reveals the impact of slowly evolving aggregate variables on price volatility moreover over the period 1990 2005 most of the macroeconomic variables had similar effects within the same commodity category e g grain but their effects differed across commodity groups e g grain versus livestock over the period 2006 2009 however commodity specific factors dominated common factors copyright 2013 oxford university press

dynamic programming approach for valuing options in the garch model in this paper we develop an efficient algorithm to value options under discrete time garch processes we propose a procedure based on dynamic programming coupled with piecewise polynomial approximation to compute the value of a given option at all observation dates and levels of the state vector the method can be used for the large garch family of models based on gaussian innovations and may accommodate all low dimensional european as well as american derivatives numerical implementations show that this method competes very advantageously with other available valuation methods

options on the maximum or the minimum of several assets using an intuitive approach that also provides new intuition concerning the black and scholes equation this paper extends the results of johnson and stulz to the pricing of options on the minimum or the maximum of several risky assets

a multifactor spot rate model for the pricing of interest rate derivatives we propose a multifactor model in which the spot rate libor follows a lognormal process with a stochastic conditional mean under the risk neutral measure in addition to the spot rate factor the second factor is related to the premium of the first futures rate over the spot libor similarly the third factor is related to the premium of the second futures rate over the first futures rate we calibrate the model to the initial term structure of futures rates and to the implied volatilities of interest rate caplets we then apply the model to price interest rate derivatives such as european and bermudan style swaptions and yieldspread options the model can be employed to price more complex interest rate derivatives such as path dependent derivatives or multi currency dependent derivatives because of its markovian property

numerical valuation of high dimensional multivariate american securities we consider the problem of pricing an american contingent claim whose payoff depends on several sources of uncertainty several efficient numerical lattice based techniques exist for pricing american securities depending on one or few up to three risk sources however these methods cannot be used for high dimensional problems since their memory requirement is exponential in the number of risk sources we present an efficient numerical technique that combines monte carlo simulation with a particular partitioning method of the underlying assets space which we call stratified state aggregation ssa using this technique we can compute accurate approximations of prices of american securities with an arbitrary number of underlying assets our numerical experiments show that the method is practical for pricing american claims depending on up to 400 risk sources

using the binomial model for the valuation of real options in computing optimal subsidies for chinese renewable energy investments abstract for the valuation and implementation of renewable energy investments the issue of providing private investors with a financial incentive to accelerate their investment is frequently a critical component we apply this principle to the chinese context this paper focuses on using the binomial model to compute the required subsidy that would incentivize investors to optimal immediate exercise of the american style option embedded at the launching phase of the projects for chinese renewable energy investments in addition this paper also aims at contrasting the binomial model with the more laborious monte carlo simulation previously used to evaluate the proper subsidy by using the same data but a different method and reducing the number of uncertain factors to one it is suggested these two methods have similar outcomes but the binomial method requires substantially less computation and is more self explanatory this paper thus provides government with an easy to implement alternative way to compute the required subsidy

black economic empowerment disclosures by south african listed corporations the influence of ownership and board characteristics this study investigates the extent to which south african listed corporations voluntarily disclose information on black economic empowerment bee in their annual and sustainability reports using a sample of 75 listed corporations from 2003 to 2009 bee is a form of socio economic affirmative action championed by the african national congress anc led government to address historical imbalances in business participation and ownership in south africa we find that block ownership and institutional ownership are negatively associated with the extent of bee disclosures whereas government ownership board diversity age education ethnicity nationality and occupation board size and non executive directors are positively related to the extent of bee disclosures by contrast dual board leadership structure and gender diversity are not significantly associated with bee disclosures our results are robust when controlling for firm level characteristics fixed effects and alternative disclosure proxies our results are largely consistent with the predictions of agency legitimacy resource dependence and stakeholder theories

volatility and price jumps in agricultural futures prices evidence from wheat options revised version published in american journal of agricultural economics vol 86 number 4 november 2004 1018 1031

a note on an interpretation to consumption based capm abstract the consumption based capm pricing rule is sometimes interpreted as implying that the price of an asset with a random payoff falls short of its expected payoff if and only if the random payoff positively correlates with consumption this note demonstrates that this interpretation to c capm is not generally correct more importantly it investigates under what qualifications this intuitive interpretation still holds

optimal feed in tariff for solar photovoltaic power generation in china a real options analysis abstract the feed in tariff policy is widely used to promote the development of renewable energy china also adopts feed in tariff policy to attract greater investment in solar photovoltaic power generation this study employs real options method to assess the optimal levels of feed in tariffs in 30 provinces of china the uncertainties in co 2 price and investment cost are considered a method that integrates the backward dynamic programming algorithm and least squares monte carlo method is used to solve the model the results demonstrate that the feed in tariffs of 30 provinces range from 0 68 rmb kwh to 1 71 rmb kwh and the average level is 1 01 rmb kwh on this basis we find that the levels of sub regional feed in tariff announced in 2013 are no longer appropriate and should be adjusted as soon as possible we have also identified the implications of technological progress and carbon emission trading schemes as well as the importance of strengthening electricity transmission it has been suggested that the chinese government takes diverse measures including increasing research and development investment establishing and improving a nationwide carbon emission trading scheme and accelerating the construction of electricity transmission infrastructure to reduce the required feed in tariff and promote the development of solar photovoltaic power generation

numerical evaluation of multivariate contingent claims we develop a numerical approximation method for valuing multivariate contingent claims the approach is based on an n dimensional extension of the lattice binomial method closed form solutions for the jump probabilities and the jump amplitudes are obtained the accuracy of the method is illustrated in the case of european options when there are three underlying assets article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

discrete time valuation of american options with stochastic interest rates we develop an arbitrage free discrete time model to price american style claims for which domestic term structure risk foreign term structure risk and currency risk are important this model combines a discrete version of the heath jarrow and morton 1992 term structure model with the binomial model of cox ross and rubinstein 1979 it converges weakly to the continuous time models in amin and jarrow 1991 1992 the general model is path dependent and can be implemented with arbitrary volatility functions to value claims with maturity up to five years the model is illustrated with applications to long dated american currency warrants and a cross rate swap from the quanto class article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

a lattice framework for option pricing with two state variables a procedure is developed for the valuation of options when there are two underlying state variables the approach involves an extension of the lattice binomial approach developed by cox ross and rubinstein to value options on a single asset details are given on how the jump probabilities and jump amplitudes may be obtained when there are two state variables this procedure can be used to price any contingent claim whose payoff is a piece wise linear function of two underlying state variables provided these two variables have a bivariate lognormal distribution the accuracy of the method is illustrated by valuing options on the maximum and minimum of two assets and comparing the results for cases in which an exact solution has been obtained for european options one advantage of the lattice approach is that it handles the early exercise feature of american options in addition it should be possible to use this approach to value a number of financial instruments that have been created in recent years

time to build option value and investment decisions abstract investment decisions and outlays are often made sequentially for example the rate at which construction proceeds is usually flexible and can be adjusted with the arrival of new information traditional discounted cash flow methods which treat the pattern of investment as fixed ignore this flexibility and understate the value of the project this paper uses contingent claims analysis to derive optimal decision rules and to value such investments we determine the effects of time to build opportunity cost and uncertainty on the investment decision for reasonable parameter values we show how a simple npv rule can lead to gross errors

valuing target price support programs with average option pricing the u s government deficiency payment program supplements farm income by transferring income from taxpayers to farmers when revenue lost due to the acreage restriction exceeds revenue gained from participating in the program farmers lose money by participating therefore measuring expected revenue from the government program is important so that farmers can decide whether to participate in the program this study uses a garch average option pricing model and the black average option pricing model to predict the implicit premium of the u s government deficiency payment program the average option pricing model considers the average price of the underlying asset over a fixed period a regression model based on the simulation results is provided so that the average option models can be easily used to project deficiency payments the results can be used by extension economists to help producers decide whether to participate in the program

real option valuation of facts investments based on the least square monte carlo method efficient and well timed investments in electric transmission networks that cope with the large ongoing power market uncertainties are currently an open issue of significant research interest strategic flexibility for seizing opportunities and cutting losses contingent upon an unfavorable unfolding of the long term uncertainties is an attribute of enormous value when assessing irreversible investments in this sense flexible ac transmission systems facts devices appear as an effective manner of adding flexibility to the transmission expansion planning this article proposes an investment valuation approach which properly assesses the option value of deferring transmission lines investments whereas gaining flexibility by investing in facts devices the flexibility provided by facts investments option to abandon and to relocate is assessed through a real option valuation approach based on the novel least square monte carlo method in order to illustrate the practicability of the proposed valuation approach a traditional expansion strategy lines and a flexible investment strategy lines and facts are compared in a real study case the article shows that a proper combination of lines and facts leads to efficient investments by allowing a progressive adaptation of the transmission grid to the changing scenarios

choice of nuclear power investments under price uncertainty valuing modularity this work aims at examining how to compare two investment projects in the electricity market the first project is a flexible sequence of small nuclear power plants whereas the second is a nuclear power plant of large capacity we measure the option value generated by the modularity of the first project given the uncertain future competitive price of electricity using a realistic calibration of the model we show that the option value of modularity has a sizeable effect on the optimal dynamic strategy of the producer in particular in terms of the optimal timing of the decision to invest in the first module