Compound Options
Numerical valuation methods and a real option application
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Abstract
In this thesis, several compound options and a real option application will be valued. First, an introduction to real options and our application will be given and bridges between financial and real options will be established. Then, an asset price model will be introduced which will be used throughout the whole thesis to value options, and several financial options will be introduced: European options, American options and compound options. If there exists a closed-form solution of the option value of these options, it will be provided and derived. When there is no closed-form solution available, numerical valuation methods should be used. The binomial method, trinomial method and Monte Carlo simulation are methods which will be explained and used in this thesis. After the introduction of these valuation methods, the results will be compared to the results obtained from the closed-form solution. When the correctness of the valuation methods methods has been confirmed, they will be used for the compound options and real option application.