Abstract

MENDOZA SANDOVAL, Sergio; CRUZ AKE, Salvador  and  VENEGAS MARTINEZ, Francisco. Real option project valuation with fundamental economic variables correlated cash flows and extreme value jumps: COMERCI UCB case viability. Contad. Adm [online]. 2014, vol.59, n.1, pp.63-93. ISSN 0186-1042.

This paper extends the method of discounted cash flows to value investment projects through incorporating real options. It is assumed the cash flows generated by the firm are correlated with macroeconomic fundamentals, particularly with the interest rate. It is also assumed that the cash flows have jumps whose size is given by an extreme value distribution. The flows are viewed as a portfolio of real options. The options arise from a stochastic dynamic optimization process where the investor (the entrepreneur) seeks to maximize his/ her total profit discounted, subject to the wealth he/she possesses. This wealth includes the investment project, a risk-free bond, and a set of real options associated with the project.

Keywords : project assessment; derivatives; portfolio theory.

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