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Discounting, value and dollar beta matching in flexible cashflow systems

Activity: Talk or presentation typesPublic Lecture/ Debate/Seminar

28/05/2014

Abstract: Discounting, value and dollar beta matching in flexible cashflow systems. The flexibility to switch from one cashflow to another has option value. We develop the betas of these option values and use them in first order conditions for optimal exercise. Because option functions smooth paste to their targets, the dollar weighted betas of options must match along with their values at exercise. For operational flexibility which allows switching between distinct cashflow modes, we use a discount function representation to relate an option’s value at creation to its end value. Three sets of equations determine a system where all option and investment sums (strikes) can be solved as a function of given investment thresholds. Essential option prices are placed in vectors and the investment network (graph) is captured by a matrix of discount factors allowing large structures with many operating modes to be solved. (with Steinar Ekern and Sigbjorn Sodal)

External organisation (External collaborations)

NameUniversity of Essex
Location