| Most operational decisions in energy markets share three important characteristics in varying degrees. First, the uncertainty in energy prices can drastically affect the future profits from an asset. The best one can do is to assess the probabilities of outcomes that affect the profitability of the asset. Second, there is the ability to time the decision. Thirdly, the operating decision is at least partially irreversible.; The real options approach tries to incorporate those characteristics into the operation and valuation of assets. Real options incorporates the technology and concepts developed for pricing financial derivatives. Information from financial markets enables the rigorous analysis of complex decisions in uncertain environments.; Real options can be broken down into two major categories: operating decisions and investments decisions. For operating decisions real options values and capitalizes on the operating flexibilities and rigidities of an asset. For investment decisions real options can quantify the value of embedded options, interactions with a firm's other investments, and follow-on investment opportunities.; Coupled real options are a sequence of options that interact with each other. Exercising one option creates another option and finally, through a series of options, one may return to the original option. The interaction between these options can cause changes in the optimal decision policy of the individual options in the series.; The relevant theory to value the coupled real option is developed in this dissertation. A constructive proof of the existence of solutions leads to a computational algorithm for solving coupled options. Using the theory developed to solve coupled real options, the valuation of three distinct types of assets is solved. The first is a natural gas storage facility. The second is volatility trading. Finally, the valuation of a thermal power plant is performed using the theory.; In order to compute the value of an option in higher dimensions, a new algorithm using Monte Carlo simulation for solving American options will be introduced. |
