Regression sensitivity analysis for cash flow simulation based real option valuation

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    Abstract

    Sensitivity analysis on financial options considers how the solution changes because of a change in one of the key parameters (underlying asset value, volatility, exercise price, interest rate, time to maturity, dividends). In case of real option valuation with cash flow simulation, however, these are mostly indirect variables which are computed based on the uncertain direct variables – e.g. demand, unit selling price, and unit costs - in the cash flow calculation. The method presented detects the most significant primary variables, and based on this analysis, shows how changes in the direct uncertainties can be used to estimate with the response surface method the simultaneous changes in the indirect parameters defining the underlying asset process and thus the real option value.
    Original languageEnglish
    Pages (from-to)7670-7671
    JournalPROCEDIA: SOCIAL AND BEHAVIORAL SCIENCES
    Volume2
    Issue number6
    DOIs
    Publication statusPublished - 2010
    MoE publication typeA1 Journal article-refereed
    EventInternational Conference on Sensitivity Analysis of Model Output - Milano, Italy
    Duration: 19 Jul 201020 Jul 2010
    Conference number: 6

    Keywords

    • sensitivity analysis
    • cash flow simulation
    • real options

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