You are here

IDENTIFICATION AND QUANTIFICATION OF INCREMENTAL MARKET RISK USING ALTERNATE VALUATION METHODS

Journal Name:

Publication Year:

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.

REFERENCES

References: 

Black, F., and M. Scholes. “The Pricing of Options and Corporate Liabilities.” Journal of Political Economy, 81, May-June, 1973: 637-54.
Brennan, M. J. “An approach to the valuation of uncertain income streams.” Journal of Finance, 28, July 1973: 661-73.
Brennan, M.J. and Schwartz, 1985, “Evaluating Natural resource Investments”, Journal of Business, Vol. 58, No. 2, University of Chicago.
Fisher, Irving. The rate of Interest: its Nature, Determination and Relation to Economic Phenomena. New York: Macmillian, 1907.
Gentry, D. W., and T. J. O’Neill. Mine Investment Analysis. New York: Society of Mining Engineers of AIME, 1984.
Gibson, R. (1991). Option Valuation, Analyzing and Pricing Standardized Options, Contracts, New York: McGraw Hill.
Lehman, J. (1988). “Valuing Oil Field Investment Using Option Pricing Theory”, S.P.E., Preprint, pp. 125-136.
Neveu, R. R. (1989). Fundamentals of Managerial Finance, 3d ed. Cincinnati: South-Western.
Palm, S. K., N. D. Pearson and J. A. Read, Jr. “Option Pricing: A New Approach to Mine Evaluation.” CIM Bulletin, May 1986, 61-66.
Pindyck, R. S. “Adjustment Costs, Uncertainty, and the Behavior of the Firm.” The American Economics Review, Vol. 72, No. 3, June 1982.
Pindyck, R. S. “Uncertainty and exhaustible resource markets.” Journal of Political Economy, 88 (December 1988): 1203-25
Pindyck, R. S. “Irreversibility, Uncertainty, and Investment.” Journal of Economic Literature, Vol: 29, Iss:3, Sep. 1997, 1110-1148.
@ Risk Advanced Risk Analysis for Spreadsheet, Palisade Corporation, Newfield, NY
Sarkarat, S. 1996. Evaluation of Mineral Project Using Simulation and Expert System: A Case for a gold Mine Evaluation. Ph. D. Dissertation, West Virginia University, Morgantown.
Siegal, D. R., Smith D. R., and Paddock, J. L. (1985). “Valuing Offshore Oil Properties with Option Pricing Methods.” Northwestern University Department of Finance, Working Paper No 4.
Tilton, J. E. “The Causes of Market Instability: An overview.” Materials Society, 5, 1981, 247-55.
Tinsley, R. C. (1985). Analysis of Risk Sharing, in C. R. Tinsley et al (ed), Finance for the Mineral Industry, SEM/AIME, New York: pp. 419 -425.
Torries, T. F. Introduction to Mineral Project Evaluation. Working Paper May 6, Division of Resource Management, West Virginia University, 1992.
Torries, T. F. Competitive cost analysis in the Mineral Industries. Department Working Paper No. 100, Department of Mineral and Energy Resource Economics, West Virginia University, 1988.

Thank you for copying data from http://www.arastirmax.com