This paper presents a recombining trinomial tree for valuing real options with changing volatility. The trinomial tree presented in this paper is constructed by simultaneously choosing such a parameterization that sets a judicious state space while having sensible transition probabilities...

This paper describes a real options valuation method for situations where the underlying asset may have negative values and the underlying project present value distribution is something of the shape between normal and lognormal distribution causing skewness to the rate of return distribution....

Cash flow simulation embedded option is an option whose value is based on choosing the optimal decision in each time step during a single cash flow calculation simulation run. Cash flow simulation embedded options are mostly operative options with continuous, gradual and nearly immediate...

This paper presents a practical volatility estimation method for cash flow simulation based real option valuation with changing volatility. During cash flow simulation, present value of the future cash flows and their corresponding cash flow state variable values are recorded for all time...

Sensitivity analysis identifies the critical aspects of the investment model that affect model output uncertainty. Common sensitivity analysis on options considers how the solution changes as a result of change in one of the key parameters (underlying asset value, volatility, exercise price,...

Volatility is a significant parameter both in financial and real options valuation. However, in the case of several real option projects there is no historical data available. In such cases, one alternative is to use Monte Carlo simulation on projects' cash flows for estimating volatility. An...