Validation of SD Models for the Valuation of Exotic Options in Infrastructure Investment
Publication: Journal of Infrastructure Systems
Volume 29, Issue 2
Abstract
There has been a significant amount of research related to the valuation of real options that are increasingly complex in terms of payoff structure. In addition, infrastructure procurement is becoming more complex as individual assets are increasingly viewed as being part of a larger network of interdependent systems. In response, this investigation utilizes a System Dynamics (SD) model to capture the relationships between competing assets where simulation results elucidate the causal effects between multiple investments that traverse infrastructure systems. An illustrative case study includes an SD model that simulates historical real-world relationships between water treatment alternatives within the shale gas value chain. This research contributes to the existing body of knowledge by showing how SD models can be used to value multiple types of real options within a portfolio of competing infrastructure assets. The valuation of each investment must consider the value of an underlying asset as well as the compounding effects of competing alternatives. Although this case study is based on water treatment options in the shale gas industry, the same methodology can be used to value real options found in other infrastructure systems.
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Data Availability Statement
Some data, including the equations with base values within the SD model that support the findings of this study are available from the corresponding author upon reasonable request.
Acknowledgments
The writers thank and express their appreciation to Frederick A. Kautz, Ph.D. Candidate at Worcester Polytechnic Institute, for offering his time and expertise on SD Modeling and both real and financial option theories.
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Information & Authors
Information
Published In
Journal of Infrastructure Systems
Volume 29 • Issue 2 • June 2023
Copyright
© 2023 American Society of Civil Engineers.
History
Received: Feb 8, 2022
Accepted: Dec 8, 2022
Published online: Feb 3, 2023
Published in print: Jun 1, 2023
Discussion open until: Jul 3, 2023
ASCE Technical Topics:
- Asset management
- Business management
- Case studies
- Engineering fundamentals
- Environmental engineering
- Financial management
- Geology
- Geotechnical engineering
- Infrastructure
- Investments
- Methodology (by type)
- Models (by type)
- Practice and Profession
- Research methods (by type)
- Rocks
- Shale
- Simulation models
- Validation
- Water treatment
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