Timing Decisions in a Multinational Context: Implementing the Amin/Bodurtha Framework

Abstract

The Amin/Bodurtha framework was developed for the valuation of American-style financial instruments driven by three sources of uncertaintydomestic interest rate risk, foreign interest rate risk and exchange rate risk. The model is not only appropriate for pricing a number of financial derivatives, but also, as we show, for valuing foreign investment projects in the presence of real options. In this paper we propose the most natural directly implementable specification within the Amin/Bodurtha framework that permits all combinations of up and down moves of these three risk factors without restricting volatility functions of the factors or correlations between them. By use of the depth-first algorithm, we can show that this specification is implementable at reasonable computation times (JEL: G13, G31, F30).

Booms and Busts as Exchange Options

“…The divestiture is modeled directly here since investors generally handle the underlying exit in the open market where prices are observed, unlike a corporate divestiture, where investors handle the divestiture behind closed doors as they may dispute the value of a previously untraded accounting entity. Alternatively, another way would be to think about the timing problem (e.g., Amin and Bodurtha (1995) and Fruhwirth et al (2007)). In this paper, the time to invest/disinvest arises when the country's equity index outperforms/underperforms the global equity benchmark.…”