Abstract

MAYA OCHOA, Cecilia  and  PAREJA VASSEUR, Julián. Real Options Valuation Based on Certainty Equivalents. ecos.econ. [online]. 2014, vol.18, n.39, pp.49-72. ISSN 1657-4206.

This purpose of this research is to identify appropriate rates to discount the flows from real options in situations in which the risk-free rate does not apply, in particular, in incomplete markets. A methodology is proposed for valuing real options based on certainty equivalence, which requires as a principal condition the consideration of preferences represented with utility functions. A constant relative risk aversion (CRRA) utility function is used to represent these preferences. The results indicate that this methodology adequately reflects how the value of a real option changes in accordance with an investor´s preferences.

Keywords : real options; utility function; certainty equivalent; incomplete markets; CRRA.

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