Images and barriers on the road to real options valuation

Modelling & Simulation Soc of Aust & NZ & Int Association for Mathematics & Computers in Simulation
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Conference Proceeding
18th World IMACS Congress and MODSIM09 International Congress on Modelling and Simulation, 2009, pp. 1486 - 1492
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for the flexibility inherent in many investment projects. This has been recognized and the attempt to value the such flexibilities is known as Real Options Analysis. This type of investment analysis involves applications of exotic option pricing theory to the evaluation of investment decisions by firms. Many investment projects involve particular types of flexibility and these situations have been identified and recognized as various types of options. This relates to investment decisions about non tradeable assets such as real estate development and mining projects. The decision to delay commencement of a mining project contingent on commodity prices rising enough to make a mining operation viable can be thought of as a type of call option. The decision to temporarily shut down a mining operation due to low commodity prices can be thought of and valued as a type of put option. Some of these options may have barrier features, where the investment project gets cancelled due to commodity prices falling below a critical level. This may the thought of as a down and out barrier option.
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