The Research Of Real Options Under Stochastic Interest Rate

Real options, a concept relative to financial options, is a right to choose in the practice.With this right, the firms can change their actions by the uncertainty factors when they are making long-term capital investment decisions. In this paper, our purpose is to study the real options under stochastic interest rate and analyse the effect of interest rate uncertainty on investment decisions.The first part is the base of this paper. Secondly, we discuss some theory and methods of real options under complete information, and bring in some difficult and problem in the study of real options. Thirdly, for many decisions, when the revenue and cost streams are relatively static and investment is driven by interest rate uncertainty, we stick to the effect of interest rate on investment decisions under a single-factor model, especially the effect of hysteresis. Fourthly, when both the revenue and interest rate fluctuate randomly, we introduce a two-factor model, then using the method of PDE and working in the framework of Black-Scholes, we obtain a formula to price such real options.