Research On Mining Investment Project With Stochastic Interest Rate

Currently, the financial crisis which is caused by the U.S. subprime mortgage crisis is still raging the global economy. So the global economic fluctuations and market uncertainties increase and mining companies face more uncertainties in the external environment. This makes it difficult for mining investment managers to invest and brings new challenges to the companies.The mining investment project has some characteristics such as a long investment time, high investment costs, irreversible and great uncertainties. The traditional investment decision-making method can not properly assess its value so that the companies often make wrong decisions. Scholars have used the real option theory to study mining investment projects. However, the previous studies often assume that the interest rate is constant. In fact, the interest rate, even if the short-term interest rate, is constantly changing. Changes in the interest rate will impact on the value of investment projects through the cash flows or the discount rate. Therefore, this paper extends the real option theory and takes the randomness of the interest rate into account. It considers that the movement of the interest rate subjects to the Vasicek interest rate model, and establishes the decision-making model for mining investment with stochastic interest rate.The main work includes the following aspects:First, this paper builds a mining investment decision model under the Vasicek interst rate model with the binary tree theory. First , it describes the movements of the interest rate in Vasicek interest rate model with the binary tree theory. And it obtains the interest rate at each node according to the characteristics of the rate. Then it analysises the underlying asset value of the project with the same theory. At last it establishes a pricing model of the project value under stochastic interest rate and gives ideas for the model decision.Second, through analyzing the Daqing Crude Oil Spot Prices, this paper finds that the prices does not always follow a continuous process, it jumps when some unusual events in the subject occur. So, this paper assumes the value of mineral resources in jump-diffusion processes, and establishes a mining investment decision mode under stochastic interest rate .Third, this paper compares the project value and the investment decision in NPV model with them in front two models. It believes that the traditional NPV method underestimates the real value of the mining investment project seriously so that easily lead to wrong decisions; comparing to the fixed interest rate, the project value is bigger and the investment time may be delayed when the interest rate changes; and comparing to the value of the project following geometric Brownian motion, the value following jump - diffusion process is more.In conclusion, this study fully considers the fact that the interest rate is stochastic. So it can estimate the value of mining investment projects reasonably with the mining investment decision model, conducive to mining companies to make more reasonable decisions, and provide a theoretical basis for mining companies to make a strategic decision.