Using option pricing theory to estimate option value - a preliminary study

Abstract

The purpose of this report is to compare and contrast two approaches to incorporating uncertainty when evaluating natural resource problems. The first approach incorporates option pricing theory which is derived from the financial economics literature. The second approach uses the concept of option value which has arisen in the literature of resource economics. The report introduces each approach separately and then compares and contrasts them. The report is in three parts - Part I deals with the option pricing theory approach to incorporating the value of uncertainty and irreversibility. Part II describes option value as commonly used in the resource economics literature. Part III describes the application of option pricing to a natural resource problem.