The Pricing And Application Of Real Option Based On Fractional Brownian Motion

Traditional method of venture capital valuation ignores the venture capital project's flexible value,including irreversibility,the uncertainty and the delay,so it underestimate the value of venture capital project.To fix the shortcomings of traditional method and to consider the real option feature of venture capital,scholars introduced the concept of real option in making investment decisions.In the application of real option method for assessing the investment value,the most important part is the pricing of real option.Trational real option pricing formula is based on the assumption that the underlying asset price followed the geometric brownian motion,however,in the actual market,the price of the underlying asset has fractal characteristics,it means that doing the research about prcing of real option under the fractional brownian motion will be more rewarding.Therefore,this paper introduce the pricing of real option under the fractional Brownian motion and the application of the prcing model to real cases.The paper is composed of five chapters.The first chapter summarize the related documents about the pricing and application of real option,then introduce the background and the significance of the research.The second chapter introduce the related knowledges about the traditional method,application of real option and fractional brownian motion,it is important for later part.In chapter three,this is the core part of the paper,after introducing the traditional method of pricing of real option,we study the prcing model by martingale and the insurance actuarial method and do a numerical experiment about option pricing model,then we discuss the prcing of real option under the assumption that the stochastic rate is Vasicek rate and the underlying asset price follows fractional brownian motion.The fourth chapter introduce the application and the parameters quantization of prcing model in chapter three to two real cases,then we analyse and compare the different investment decisions by three methods:traditional method,general real option method and fractional real option method.With the results of two cases,we can find that the hurst index of underlying asset price does be greater than 0.5,that means that the underlying asset price has fractal feature in market.The fifth chapter summarize the conclusion and the further studies.Empirical analysis shows that comparing to traditional method,real option method will be more accurate to projects' value by considering the flexible management of venture capital project.In a real market,there is the fractal feature of underlying asset price,it means that the investment result will be more objective and realistic with the method of real option.Therefore,instead of standard brownian motion,the real option prcing model under the fractional brownian motion will provides a new perspective for investors to make decisions and avoid making wrong decisions,that will be more significant.