Valuation of futures and commodity options with information costs

Article Abstract:

The Merton model of capital market equilibrium with incomplete information was utilized to assess the valuation of European and American commodity options. Through the use of the Merton model, another framework was developed for evaluating the impact of information costs on futures and forward contracts. The proposed approach introduces a new financial parameter necessary in analyzing market prices. Empirical results indicate that the market prices generated by the proposed model are significantly identical with standard financial models. The proposed framework, however, gains considerable advantage from standard model prices since it eliminates the presence of overvaluation biases inherent to market prices. It was also shown that the biases exhibited by standard models may be explained by the differences in the costs of gathering and processing information.

Economics, Research and Development in the Social Sciences and Humanities, Analysis, Futures market, Futures markets, Capital market, Capital markets, Commodity options

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Irreversibility, sunk costs and investment under incomplete information

Article Abstract:

Some basic models of irreversible investment have been developed to demonstrate the option-like features of investment opportunities under incomplete information. It was possible to extend a continuous-time model of irreversible investment in the presence of information costs to obtain the value of a project and the value of a company's option to invest in the project.

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Investment under economic and implementation uncertainty

Article Abstract:

The management of the uncertainty of the implementation phase of corporate investment schemes is considered. A general framework for incorporating implementation uncertainty into models of investment under uncertainty is provided.

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