Real options with endogenous convenience yield. Issue 3 (8th July 2019)

• Record Type: Journal Article
• Authors: Cheng, Yiying; Clark, Steven P.
• Is Part Of: Journal of corporate accounting & finance. Volume 30:Issue 3(2019)
• Page Start: 30
• Page End: 43
• Publication Date: 2019-07-08
• Subjects: endogenous convenience yield -- real options -- optimal investment timing; Accounting -- Periodicals; Accounting -- Law and legislation -- United States -- Periodicals; Corporations -- United States -- Finance -- Periodicals; Corporations -- United States -- Accounting -- Periodicals; 657
• DOI: 10.1002/jcaf.22390
• Languages: English
• ISSNs: 1044-8136

Abstract

Abstract: Traditional real options theory highlights the impact of risk on the timing of investment decisions. However, in practice, corporate projects often involve a preliminary exploratory stage, incurring a running cost and convenience yield. By analogy with commodity futures theories, we model such multistage corporate projects in a feedback‐control framework, with a dynamic aggregate convenience yield/running cost that interacts with the decisions to enter or exit the preliminary stage. We provide a closed‐form solution for this compound options model. The solution provides insight and quantifies of the optimal strategy for prevalent corporate projects with a preliminary exploration stage.