Assessing the impact of jumps in an option pricing model: A gradient estimation approach

Volk-Makarewicz, Warren; Borovkova, Svetlana; Heidergott, Bernd

doi:10.1016/j.ejor.2021.07.015

Cited by 4 publications

(3 citation statements)

References 31 publications

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“…In real life, there are "unpredictable unknowns" that characterize jump-type stochastic abrupt perturbations, such as financial crisis, earthquakes, hurricanes, and other man-made and natural disasters (Ilalan, 2016;Li, 2022). These fluctuations can be modelled with a Poisson jump or process, where the average time between events is known, but the exact timing of events is random and independent of the event (Volk-Makarewicz et al, 2022). Extending Equation 8, stochastic future prices following GBM with Poisson jumps can be described in Equation ( 10)…”

Section: Uncertainties and Monte Carlo Simulationmentioning

confidence: 99%

Decision Support for Investments in Sustainable Energy Sources Under Uncertainties

Batac

Collera

Villanueva³

et al. 2022

Int. J. Renew. Energy Dev.

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Investment in sustainable energy sources is one of the climate mitigation strategies that can significantly reduce greenhouse gas emissions in the energy sector. However, in developing countries, investment is challenged by high capital expenditures and several uncertainties. This paper aims to provide decision support for investment in sustainable energy projects by evaluating the comparative attractiveness of shifting energy sources from fossil fuels to renewables and nuclear. Applying the real options approach (ROA), we calculate the value of the flexibility to postpone the investment decision and identify the optimal timing (described here as the trigger price of coal) for shifting to sustainable energy sources. We consider various uncertainties, such as coal and electricity prices, negative externality of using fossil fuels, and the risk of a nuclear accident, which are modelled using geometric Brownian motion, Poisson process, and Bernoulli probability. Applying the ROA model in the case of the Philippines, results find that investing in sustainable energy is a better option than continuing to use coal for electricity generation. However, contrary to conventional option valuation result that waiting is a better strategy, we found that delaying or postponing the investment decisions may lead to possible opportunity losses. Among the available sustainable energy sources, geothermal is the most attractive with trigger prices of coal equal to USD 49.95/ton, followed by nuclear (USD 58.55/ton), wind (USD 69.48/ton), solar photovoltaic (USD 72.04/ton), and hydropower (USD 111.14/ton). We find that the occurrence of jump (extreme) prices of coal, raising the current feed-in-tariff, and considering negative externalities can decrease the trigger prices, which favor investments in sustainable energies. Moreover, the risk of a nuclear disaster favors investment in renewable energy sources over nuclear due to the huge damage costs once an accident occurs. Results provide bases for policy recommendations toward achieving a more secure and sustainable energy sector for developing countries that are too dependent on imported fossil fuels.

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Section: Uncertainties and Monte Carlo Simulationmentioning

confidence: 99%

Decision Support for Investments in Sustainable Energy Sources Under Uncertainties

Batac

Collera

Villanueva³

et al. 2022

Int. J. Renew. Energy Dev.

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“…Recent investigations include fuel prices (Agaton, 2022;Batac et al, 2022) and demand shocks along with investment (Wu and Hu, 2022). Volk-Makarewicza et al (2022) develop a test to determine if a Poisson jump significantly influences a GBM real option. One closely related effort is by Pimentel et al (2018) who consider both the number of mass-transportation passengers and investment expenditures as stochastic processes with Poisson jumps.…”

Section: Literaturementioning

confidence: 99%

Real Options Adoption with Poisson Price, Quantity, and Policy Uncertainty Jumps

Zhao,

Colson,

Wetzstein

et al. 2023

TEL

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“…These fluctuations can be represented by a jump process, a type of stochastic process that has discrete movements, called jumps, with random arrival times, rather than continuous movement, typically modeled as a simple or compound Poisson process [35]. A Poisson Process is a model for a series of discrete events where the average time between events is known, but the exact timing of events is random and independent of the event [36].…”

Section: Real Options Valuation Of Energy Transitionmentioning

confidence: 99%

Will a Geopolitical Conflict Accelerate Energy Transition in Oil-Importing Countries? A Case Study of the Philippines from a Real Options Perspective

Agaton

2022

Resources

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Geopolitical conflicts, involving a major player in the world market, affect the prices of oil and commodities, particularly in oil-importing countries. Consequently, the unprecedented changes in oil prices impact investments in energy transition projects. This study aims to analyze the dynamics of investment decisions in energy transition under uncertainties in geopolitical risks. This research applies the Black-Scholes-based real options valuation to value the flexibility in postponing energy transition investments considering the repercussions of the Russia-Ukraine war. Applying the proposed model to the case of the Philippines, the valuation result with a net present value of USD 231 million for a 1 GW capacity shows that energy transition is a viable project when the cost savings from using fossil fuels to renewables are considered. On the other hand, real options valuation finds a higher flexibility value of USD 990 million, which implies a better decision to postpone the project. The uncertainty in geopolitical conflicts further increases this value causing a longer waiting period to implement the energy transition project. Sensitivity analysis shows that the results are robust to changes in the explanatory variables. Results provide policy implications on making an oil-importing country energy self-sufficient and robust from economic and geopolitical shocks.

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Assessing the impact of jumps in an option pricing model: A gradient estimation approach

Cited by 4 publications

References 31 publications

Decision Support for Investments in Sustainable Energy Sources Under Uncertainties

Decision Support for Investments in Sustainable Energy Sources Under Uncertainties

Real Options Adoption with Poisson Price, Quantity, and Policy Uncertainty Jumps

Will a Geopolitical Conflict Accelerate Energy Transition in Oil-Importing Countries? A Case Study of the Philippines from a Real Options Perspective

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