Cash flow estimation for real option analysis using Margrabe's model

György Andor; Gábor Bóta

doi:10.1556/aoecon.56.2006.2.3

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Acta Oeconomica

Volume/Issue:: Volume 56: Issue 2

Cash flow estimation for real option analysis using Margrabe's model

Authors:

György Andor

György Andor Department of Finance, Faculty of Economics and Social Sciences, Budapest University of Technology and Economics Műegyetem rkp. 9, R. bld. 202, H-1111 Budapest, Hungary

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Gábor Bóta

Gábor Bóta Department of Finance, Budapest University of Technology and Economics Műegyetem rkp. 9, R. bld. 202, H-1111 Budapest, Hungary

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Pages:: 183–194

Online Publication Date:: 28 Sep 2006

Publication Date:: 01 Jun 2006

Article Category:: Journal Article

DOI:: https://doi.org/10.1556/aoecon.56.2006.2.3

Keywords:: real options; cash flow estimation; project valuation; capital budgeting

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This paper looks at how the parameters for real option analysis can be extracted from the general capital budget of a project and discusses how the estimated cash flows of a general project can be used for a real option analysis. A project is described where it is possible to stop the business operation in case of predicting a loss for the next year. Our model shows how the cash flow of the period influenced by the option-like decision has to be separated in order to get the exercise price and the price of the underlying asset for real option valuation. Besides providing arguments against the suitability of the general Black-Scholes formula for real option situations, the paper also shows how Margrabe's exchange option valuation formula may be used, and how the volatility as a parameter of this model can be calculated from the data available about the project.

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Acta Oeconomica Periodical of the Hungarian Academy of Sciences

Print ISSN:: 0001-6373

Online ISSN:: 1588-2659

Associate Editors

Péter Benczúr, Joint Joint Research Center, European Commission
Dóra Benedek, International Monetary Fund
Balázs Égert, OECD
Dániel Prinz, World Bank
Rok Spruk, University of Ljubljana, School of Economics and Business, Slovenia

Editorial Board

Anders Åslund, Georgetown University and Advisory Council of CASE, USA
István Benczes, Corvinus University of Budapest, Hungary
Agnieszka Chłoń-Domińczak, SGH Warsaw School of Economics, Poland
Fabrizio Coricelli, University of Siena, Italy
László Csaba, Corvinus University of Budapest, Hungary and Central European University, Austria
Beáta Farkas, Faculty of Economics and Business Administration, University of Szeged, Hungary
Péter Halmai, Budapest University of Technology and Economics, and National University of Public Service, Hungary
Martin Kahanec, Central European University, Austria
David Kemme, University of Memphis, USA
Michael Landesmann, The Vienna Institute for International Economic Studies (WIIW), Austria
Péter Mihályi, Corvinus University of Budapest, Hungary
Debora Revoltella, European Investment Bank

Corvinus University of Budapest
Department of Economics
Fővám tér 8 Budapest, H-1093, Hungary
E-mail: judit.kalman@uni-corvinus.hu

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2024
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SJR index	0.201
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Rank by Impact Factor	Q3 (Economics)
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CiteScore	1.4
CiteScore rank	Q3 (Economics and Econometrics)
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SJR index	0.218
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Acta Oeconomica
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Acta Oeconomica
Language	English
Size	B5
Year of Foundation	1966
Volumes per Year	1
Issues per Year	4
Founder	Magyar Tudományos Akadémia
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ISSN	0001-6373 (Print)
ISSN	1588-2659 (Online)