The Pricing Model And Application Of Causal Compound Option

Multi-stage venture investments are generally in uncertain environment, contain therisk of failure. This kind of risk determines the importance of investment evaluationmethod. The traditional NPV evaluation method ignores the growth opportunities fromthe initial investment and the added value from investors grasp the investment strategiesflexibly, tend to cause the value of project underestimate, thus the investors lose someinvestment opportunities. And causal compound option overcomes these shortcomings,in recent years, as a kind of evaluation tools are widely used in all kinds of investmentprojects valuation issue researches.This paper on the basis of previous studies, cent two kinds of situations to expandthe causal compound option pricing model, and applies it for specific cases, and for somefactors with the sensitivity analysis. The thesis includes five chapters.In chapter one, we introduce the history and current research of option pricing, thebasis of selected topic and the significance, the main content and the technical route inthis dissertation.In chapter two, we don’t consider the influence of external factors, don’t add “jump”situation, by analyzing of classic Black-Scholes and Geske model, expand the simplecausal compound option to the multi-stage causal compound option, and use the methodof partial differential equations to solve out the multi-stage causal compound option’pricing model. Then we do simply further expand, each layer option considers the twosituations of bullish and bearish, at the same time, we consider the situation that theinterest rate, bonus ratio and volatility depend on function of time.In chapter three, we consider the influence of external factors, add “jump” situation,by analyzing of classic Black-Scholes-Merton model, assume the affection of multipleemergencies’ impactions, option price fluctuates follow the jump-diffusion process, weestablish the pricing model of multi-stage causal compound option followingjump-diffusion process, makes the multi-stage causal compound option application morecloser to the competition widespread and increasingly fierce society.In chapter four, according to a biological medicine research and developmentproject, we apply the two considering situation’s multi-stage causal compound optionpricing formula respectively, to help the investment company to decide whether to put the initial investment to the project, learned that risk investment should try to avoid theinterference of external information. And we do the sensitivity analysis for some factors,to get some conclusions benefit the risk investment decisions.In chapter five, we summarize the main results in this dissertation and point outsome issues which need further improvement.