Title: Valuation of mining projects using option pricing techniques
Abstract: The standard valuation technique - discounted cash flows (DCF) - estimates value as the present value of expected future cash flows. This technique is typically implemented under an assumption that investment policy is independent of prices. In reality, management responds to fluctuating commodity prices by altering investment policy, such that production expands in the high price scenario and reduces in response to low prices. Management's ability to exercise these options to alter investment policy is valuable - approximately 30 percent of the value of high-growth, high volatility firms can be attributed to the value of embedded options (Hall, 2005). Since close to one-third of large, Australian-listed firms are using option pricing techniques to improve decision-making (Truong, Partington and Peat, 2005), this is likely to replace DCF as the standard valuation technique in the foreseeable future.
Publication Year: 2007
Publication Date: 2007-01-01
Language: en
Type: article
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Cited By Count: 7
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