Managing Investment Opportunities under Price Uncertainty: From "Last Chance" to "Wait and See" Strategies

Bjerksund, Petter; Ekern, Steinar

doi:10.2307/3665826

Cited by 92 publications

(60 citation statements)

References 19 publications

Supporting

Mentioning

Contrasting

Unclassified

Order By: Relevance

“…The ultimate purpose when assessing the option to defer investment is to determine the optimal time to invest. Following [6], we assume that the decision to defer has no impact on the resource's depletion pattern (which is fixed). Upon investment, production continues without any interruption; this looks reasonable since most of the available reserves are depleted during the first two years of operation.…”

Section: Numerical Evaluation Of Real Optionsmentioning

confidence: 99%

“…Compared to the well's npv for the same cost (7.07 $/bbl) this means that the abandonment option is worth as much as 45% of the former. Similarly, Reference [26] considers several real options in an offshore oil project, namely learning options, the option to develop, and the option to abandon; the most valuable of them, by and large, is the abandonment option; see also [6,7,28]. Table 4 shows the option value as a function of S 0 and c. All else equal, if the initial spot price of oil increases the abandonment option is less likely to be exercised and consequently less valuable.…”

Section: Valuation and Management Of The Option To Abandonmentioning

confidence: 99%

“…Regarding early works along similar lines, Reference [6] addresses a deferrable opportunity to develop an oil field. The authors also envisage the possibility that oil price can drop low enough to make abandoning the entire project the desirable course of action.…”

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Valuation of Real Options in Crude Oil Production

Abadie

Gómez

2017

Energies

View full text Add to dashboard Cite

Oil producers are going through a hard period. They have a number of real options at their disposal. This paper addresses the valuation of two of them: the option to delay investment and the option to abandon a producing field. A prerequisite for this is to determine the value of a producing well. For this purpose we draw on a stochastic model of oil price with three risk factors: spot price, long-term price, and spot price volatility. This model is estimated with spot and futures West Texas Intermediate (WTI) oil prices. The numerical estimates of the underlying parameters allow calculate the value of a producing well over a fixed time horizon. We delineate the optimal boundary that separates the investment region from the wait region in the spot price/unit cost space. We similarly draw the boundary governing the optimal exercise of the option to abandon and the one governing the active/inactive production decision when there is no such option.

show abstract

Section: Numerical Evaluation Of Real Optionsmentioning

confidence: 99%

Section: Valuation and Management Of The Option To Abandonmentioning

confidence: 99%

See 1 more Smart Citation

Valuation of Real Options in Crude Oil Production

Abadie

Gómez

2017

Energies

View full text Add to dashboard Cite

show abstract

“…Hence, the owner's optimization problem is to find the optimal time to invest, given uncertainty about project cash flows. Similar models are analyzed in McDonald and Siegel (1986), Paddock et al (1988), Bjerksund and Ekern (1990), Dixit and Pindyck (1994), among others.…”

Section: Introductionmentioning

confidence: 99%

Asymmetric Information and Irreversible Investments: An Auction Model

Mæland

2005

SSRN Journal

View full text Add to dashboard Cite

The owner of a real option does not have the necessary expertise to manage the investment project and needs to contract with an expert in order to exercise the real option. The potential managers (the experts) have private information about their respective cost of investing in the project. The project owner organizes an auction in which the experts participate. The winner of the contract is the expert who can exercise the investment project at the lowest cost. The optimal contract is incentive compatible, i.e., it induces the winner to follow the investment strategy preferred by the project owner. It is shown that private information increases the project owner's cost of exercising the option, which may lead to under-investment. The inefficiency due to under-investment decreases in the number of experts participating in the auction. (JEL: G31, D82, G13)

show abstract

“…The solution in (5)- (7) is analogous to the solution of a perpetual American call option under the assumption that the underlying asset follows a geometric Brownian motion process. It also equals the real option values in McDonald and Siegel (1986), Dixit (1989), and Bjerksund and Ekern (1990), among others.…”

Section: Evaluation Of Future Cash Flows: a First-best Benchmarkmentioning

confidence: 99%

Effects of Moral Hazard and Private Information on Investment Timing: An Auction Model

Mæland¹

2006

SSRN Journal

View full text Add to dashboard Cite

This paper analyzes investment timing in the presence of agency conflicts and information asymmetries. It is assumed that an owner of an investment project (a real option) needs specialized expertise in order to make the investment. There are n firms with the required knowledge, and these "expert firms" compete about a contract that gives the contract winner the right to manage the investment. Each competitor chooses an unobserved effort that influences the probability of its investment cost level. When effort is made, each expert firm privately observes its own investment costs, but not the competitors'. The winner of the contract is the firm that (truthfully) reports the lowest investment cost.The private information problem increases the critical price of investment compared to the case of no inefficiency. When moral hazard is included in the model, the effect on the trigger value is ambiguous for n > 1. In the case in which there is one expert firm (n = 1), the moral hazard problem always mitigates the inefficiency cost due to private information. The last result is consistent with findings in Grenadier and Wang (2005).

show abstract

Managing Investment Opportunities under Price Uncertainty: From "Last Chance" to "Wait and See" Strategies

Cited by 92 publications

References 19 publications

Valuation of Real Options in Crude Oil Production

Valuation of Real Options in Crude Oil Production

Asymmetric Information and Irreversible Investments: An Auction Model

Effects of Moral Hazard and Private Information on Investment Timing: An Auction Model

Contact Info

Product

Resources

About