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Risks 2018, 6(1), 5; doi:10.3390/risks6010005

Optimal Investment under Cost Uncertainty

Questrom School of Business, Boston University, Boston, MA 02215, USA
Author to whom correspondence should be addressed.
Received: 9 December 2017 / Revised: 9 January 2018 / Accepted: 16 January 2018 / Published: 22 January 2018
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This paper studies the valuation of real options when the cost of investment jumps at a random time. Three valuation formulas are derived. The first expresses the value of the project in terms of a collection of knockout barrier claims. The second identifies the premium relative to a project with delayed investment right and prices its components. The last one identifies the premium/discount relative to a project with constant cost equal to the post-jump cost and prices its components. All formulas are in closed form. The behavior of optimal investment boundaries and valuation components are examined. View Full-Text
Keywords: American option; real options; optimal stopping; random strike; early exercise premium; free-boundary problem American option; real options; optimal stopping; random strike; early exercise premium; free-boundary problem

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This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. (CC BY 4.0).

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Detemple, J.; Kitapbayev, Y. Optimal Investment under Cost Uncertainty. Risks 2018, 6, 5.

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