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Sebastian Jaimungal
Title: The Optimal Time to Invest when Production Volume is Uncertain
Abstract
The optimal time to invest in a project has been studied from many perspectives. In the context of investing in an oil field, the production volume is unknown at the outset - a key element absent in previous works.
Given that the volume has a direct impact on the project's value, it is crucial to understand the effects of this uncertainty. Here, I introduce a model which allows the volume to be discovered as time evolves while simultaneously taking into account the mean-reverting nature of spot oil prices and the term structure of the futures curve. I develop a variation of the mrFST method of Jaimungal and Surkov (2009) to account for volume uncertainty, jumps in prices, and mean-reversion and use it to value the timing option. The consequence of the ability to update the volume estimate is explored through numerical experiments with special emphasis on the modified trigger curves.
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