In this note a general model of optimal hedging is studied which emcompasses most other existing hedging models. Assuming a convex form of the function of deadweight costs, the optimal hedging strategy is discussed. An analogy to the analysis of behavior towards risk of an expected utility...

This paper provides a detailed analysis of the Least Squares Monte Carlo Simulation Method (Longstaff and Schwartz, 2001) and of the extension of Gamba (2003) to value portfolios of real options. The accuracy of the method is assessed when valuing stylised real options as maximum, compound or...

Traditional real options models demonstrate the importance of the quot;option to waitquot; due to uncertainty over future shocks to project cash flows. However, there is often another important source of uncertainty: uncertainty over the permanence of past shocks. Adding Bayesian uncertainty...

This paper studies various possible approaches to improving the least squares Monte Carlo option valuation method. We test different regression algorithms and suggest a variation to estimating the option continuation value, which can reduce the execution time of the algorithm by one third. We...

Much of the work on real options assumes that the underlying state variable follows a geometric Brownian motion with constant volatility. This paper uses a more general assumption for the state variable process which may better capture the empirical observations found in the financial economics...

This paper uses contingent claims analysis to investigate the staging decision of a venture capitalist in a principal-agent framework. Venture capital investment opportunities are modeled as real options with multiple volatilities, and the entrepreneur's incentive is assumed to maximize the...

In this paper, the process for firms to decide whether or not to invest in corporate social responsibility is treated from a real option perspective. We extend the Husted (2005) framework with an important extra parameter that allows us to understand the timing of CSR investment and explain why...

We build a Conditional Real Options model VORC which allows for cashflows to be probabilistic and contingent on the average behavior of an external variable; and we apply our model to the crude oil market where the inflows on an investment project are contingent on the state of the base -the...

Some recent studies offer strong theoretical support for the use of residual income as the key performance measure in managerial compensation contracts. In particular, they show that such contracts can induce a better informed manager to make decisions about quot;normalquot; investment projects...

We investigate the relationship between derivatives use and the extent of asymmetric information faced by the firm. Using alternative analyst forecast proxies for asymmetric information, we find evidence that both the use of derivatives and the extent of derivatives usage is associated with...