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Revisiting the Tourinho real options model: outstanding issues 30 years later

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  • Octavio Augusto Fontes Tourinho

Abstract

This article presents and extends the first known model in real options, proposed in Tourinho (1979), and provides thoughts on addressing issues that are still outstanding 30 years later. It discusses the need to ensure the existence of market equilibrium when applying real options valuation to price assets, once all agents behave as suggested by the solution to the pricing equation. It argues that this can be achieved by using a stochastic process for the price that is sufficiently general to respond to supply and demand imbalances in the market for the resource. Once the individual decision rules are derived, the parameters of the process must be determined to ensure market equilibrium exists. For reserves of natural resources, this can be done by using a mean-reverting process for the price of the commodity and ensuring that the long-term price to which it reverts equals the trigger price for development of the marginal reserve.

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  • Octavio Augusto Fontes Tourinho, 2013. "Revisiting the Tourinho real options model: outstanding issues 30 years later," The European Journal of Finance, Taylor & Francis Journals, vol. 19(7-8), pages 591-603, September.
    • Handle: RePEc:taf:eurjfi:v:19:y:2013:i:7-8:p:591-603
    DOI: 10.1080/1351847X.2011.601686
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    Cited by:

    1. Alexander, Carol & Chen, Xi & Ward, Charles, 2021. "Risk-adjusted valuation for real option decisions," Journal of Economic Behavior & Organization, Elsevier, vol. 191(C), pages 1046-1064.

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