Evaluating Natural Resource Investments

Brennan, Michael J.; Schwartz, Eduardo S.

doi:10.1086/296288

Cited by 1,884 publications

(1,219 citation statements)

References 35 publications

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“…The original paper on using stochastic control for tolling agreements is due to Brennan and Schwartz (1985). They introduced this methodology to price a copper mine, once more with geometric Brownian motion for commodity price {X t }.…”

Section: Relation To Existing Literaturementioning

confidence: 99%

“…The resource is subject to fluctuating price levels and the firm can stop and restart extraction. On infinite horizon, exhaustible resources have been studied in a classic paper by Brennan and Schwartz (1985). However, for realistic financial planning the horizon should be finite.…”

Section: Exhaustible Resourcesmentioning

confidence: 99%

“…For comparison we take up the example of mine management in Brennan and Schwartz (1985). Consider a copper mine with finite inventory worth 15 years of production.…”

Section: Exhaustible Resourcesmentioning

confidence: 99%

“…This dynamic optimal switching setting is the only way to fully capture the interplay between limited flexibility and uncertainty. The origins of our method go back to Brennan and Schwartz (1985), but only recently it has been rigorously studied.…”

Section: Introductionmentioning

confidence: 99%

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Pricing Asset Scheduling Flexibility using Optimal Switching

Carmona

Ludkovski

2008

Applied Mathematical Finance

108

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We study the financial engineering aspects of operational flexibility of energy assets. The current practice relies on a representation that uses strips of European spark-spread options, ignoring the operational constraints. Instead, we propose a new approach based on a stochastic impulse control framework. The model reduces to a cascade of optimal stopping problems and directly demonstrates that the optimal dispatch policies can be described with the aid of 'switching boundaries', similar to the free boundaries of standard American options. Our main contribution is a new method of numerical solution relying on Monte Carlo regressions. The scheme uses dynamic programming to efficiently approximate the optimal dispatch policy along the simulated paths. Convergence analysis is carried out and results are illustrated with a variety of concrete examples. We benchmark and compare our scheme to alternative numerical methods.

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Section: Relation To Existing Literaturementioning

confidence: 99%

Section: Exhaustible Resourcesmentioning

confidence: 99%

“…For comparison we take up the example of mine management in Brennan and Schwartz (1985). Consider a copper mine with finite inventory worth 15 years of production.…”

Section: Exhaustible Resourcesmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Pricing Asset Scheduling Flexibility using Optimal Switching

Carmona

Ludkovski

2008

Applied Mathematical Finance

108

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“…The earliest reduced form model for commodity prices appears to be due to Brennan and Schwartz (1985). In this model the spot commodity price follows a geometric Brownian motion and the convenience yield is treated as a dividend yield.…”

Section: Introductionmentioning

confidence: 99%

A Two-Factor Model for Commodity Prices and Futures Valuation

Ribeiro¹,

Hodges

2004

SSRN Journal

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This paper develops a reduced form two-factor model for commodity spot prices and futures valuation. This model extends the Gibson and Schwartz (1990)-Schwartz (1997) two-factor model by adding two new features. First the Ornstein-Uhlenbeck process for the convenience yield is replaced by a Cox-Ingersoll-Ross (CIR) process. This ensures that our model is arbitrage-free. Second, spot price volatility is proportional to the square root of the convenience yield level. We empirically test both models using weekly

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Valuation of a European futures option in the BIFFEX market

Tvedt¹

1998

J. Fut. Mark.

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Evaluating Natural Resource Investments

Cited by 1,884 publications

References 35 publications

Pricing Asset Scheduling Flexibility using Optimal Switching

Pricing Asset Scheduling Flexibility using Optimal Switching

A Two-Factor Model for Commodity Prices and Futures Valuation

Valuation of a European futures option in the BIFFEX market

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