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IDENTIFICATION AND QUANTIFICATION OF INCREMENTAL MARKET RISK USING ALTERNATE VALUATION METHODS

Journal Name:

  • Khazar Journal of Humanities and Social Sciences

Publication Year:

  • 2009
Author NameUniversity of Author
Abstract (2. Language): 
This paper will explore the practical importance of the value of flexibility in resources assessment by evaluating investment in a gold mine project using simulation and expert system. Historically the most prominent techniques for asset valuation have been discounted cash flow analysis (DCF). The major weakness of DCF is it does not theoretically recognize risk. Siegal, Smith and Paddock (1992, p. 22) argued that the application of DCF analysis for project valuation becomes difficult for investment opportunity which provides various operational options. Another method as an alternative for discounted cash flow analysis (Pam et. Al 1986 and Gibson, 1991) is the Option Pricing Model (OPM) which provides more flexibility for management in investment decision making. However, this method could overvalue the worth of a given project if the output price is highly volatile. Recently, these authors developed an alternative valuation method by using a rule based Expert Systems that provided operational flexibility. In this paper, by using simulated cash flows, the performance of the Expert System is compared to discounted cash flow analysis DCF and OPM. The result indicated that Expert System more closely approximated the actions of investors and producers, provided managerial flexibility, resulted in a lower coefficient of variations, and minimized possible losses in the operation process. Furthermore, analysis of result indicated how Expert System can identify and capture the incremental market risk.
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FULL TEXT (PDF): 
PDF icon arastrmx_91826_12_pp_21-32.pdf
  • 4
21-32
  • English

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