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Valuation of a Hydro-Electric Power Project in Emerging Markets: An Application of Real Options

Author

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  • Richard Ebil Ottoo

    (Pace University)

Abstract

We apply a contingent-claims technique and demonstrate how to value an emerging market hydro electric power investment under uncertainty. The investment project depends on reliable weather conditions and the capacity of a river to drive the water turbines. Uganda’s Bujagali dam project located at the source of the Nile River is the focus of our study. We identify four mutuallyexclusive real options and incorporate the correlation of returns on rainfall and cash flows as well as a premium for lack of transparency in the estimation of project risk. We document a leverage effect and a volatility effect on project value.

Suggested Citation

  • Richard Ebil Ottoo, 2012. "Valuation of a Hydro-Electric Power Project in Emerging Markets: An Application of Real Options," The African Finance Journal, Africagrowth Institute, vol. 14(1), pages 1-36.
    • Handle: RePEc:afj:journl:v:14:y:2012:i:1:p:1-36
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    More about this item

    Keywords

    Valuation; Real Options; Cost of Capital; Project Finance; Investment; Emerging Markets; Hydro-Electricity;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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