Dranev, Y. Y.
On the Risk-Neutral Approach in Real Option Valuation
Application of real option analysis (which becomes recently very popular in developed countries) for company and project valuation depends significantly on the choice of the appropriate model. Presented in this paper semimartingale model unlike the traditional Black-Scholes model allows to describe non-stationary jump-like and history-dependent behavior of financial parameters. Major problem is that in general this model is incomplete, and there is more than one risk-neutral price. In this case the price of the real option can be determined by maximization of utility function in the sense of [Kallsen 1999]. Finally numerical methods are applied to price real options in incomplete semimartingale models.