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Investment opportunity value and investment decision

1 introduction the standard method of investment decision is discounted cash flow (DCF method for short), which is to discount the expected cash flow of the project to its present value at an appropriate discount rate, and then compare it with the investment cost. Because this method can not reflect the random characteristics of mineral product prices, it can not reflect the management options based on product price changes, so as to underestimate the cash flow. However, since the birth of this standard evaluation technology, it has not changed fundamentally. It only applies capital asset pricing theory (CAPT) in the selection of discount rate

in the early 1970s, when option trading began in the United States, option pricing was one of the hot spots of financial research. Soon, black and Scholes [3] published their option pricing model, the famous Black Scholes formula, which has become a standard tool for option trading. Two months later, Merton [3] completed similar work independently. In view of the extensive application and great success of option pricing theory and method in the field of financial investment for more than 20 years, the Royal Swedish Academy of Sciences awarded the 1997 Nobel Prize in economics to two American scholars, Scholes and Merton, in recognition of their groundbreaking contributions to the establishment and application of this theory

equally important, the option pricing theory developed from the financial industry provides a very important framework for engineering evaluation. Since black and Scholes made outstanding contributions, option pricing theory has been popularized in many aspects []. It has been applied in the evaluation of insurance contracts, negotiable securities, leasing and other fields. Recently, the South African gold mining company JCI announced that it had applied the option pricing theory to evaluate a deep gold deposit project

in the first part of this paper, options and mining management options are discussed. In the second part, according to the mining development value reflected by the random fluctuation of mineral product prices and the investment cost with random fluctuation characteristics, following the standard option pricing process, a risk-free position consisting of investment opportunity value, mineral product futures contracts and project investment forward contracts is established, The investment opportunity value model that depends on product price and investment cost is obtained, and the corresponding investment decision-making method that its energy density is said to exceed all current ternary system investment decision-making methods is given. 2 options and mining management options in financial transactions, option buyers have the option to buy and sell stocks, metals, etc. Similarly, in the mining operation, the management authority also has a certain degree of management flexibility, including operation flexibility and investment timing flexibility. The mine operation option is mainly the optimal mining option of the mine, including the optimal selection of cut-off grade, mining rate, stoppage, resumption of production, pit closure, etc. Investment time option mainly refers to the right of mining management authorities to choose the time of investment and construction. From the perspective of optimization, mining companies with new deposits can choose to invest and develop when the price of mineral products has sufficient advantages over the cost. On the contrary, development and construction can be postponed. The application of mining management option makes the mining management authorities have the option to strive for greater returns, that is to say, this option is valuable. Therefore, the value of mining development is greater than that calculated by DCF method, which is indeed the case

mining engineering investment and financial execution options have many things in common. First, they are irrevocable. Once the option is exercised, it is dead. Once the mining investment and development begins, the sunk cost cannot be compensated. Second, the timing is very important. For example, in the real value state, the possibility of early execution of American call options is very small, because the stock price can rise further, and the return of options can be further increased; Similarly, the possibility of optimal investment based on the development value V> investment cost I is also very small, because waiting for investment and development may lead to valuable information about product prices and production costs. The implementation of irrevocable investment means the loss of the option to wait for information related to the market. When such information is valuable (such as potential impact on decision-making through preliminary surface engineering control and resource estimation), it is equivalent to increasing the investment cost. In other words, the return on options cannot be negative

for most project investments, investment opportunities cannot disappear immediately, and the project investment can choose the appropriate investment time. Investment opportunities give investors the right to pay the initial expenditure of project investment, get a completed project and obtain cash flow. Investment opportunities can be used or given up. It is a right for investors, but there is no obligation to implement. The choice of investment time can enable investors to avoid the risk of downward earnings and further see the potential of upward earnings. Investment opportunity is like a call option. An American call option gives the holder a right to pay the strike price of the option and get the underlying asset of the option within a certain period of time. For mining project investment, the underlying asset can be regarded as a completed mine, the execution price is the initial investment expenditure, and the validity period is the time when the investment opportunity can be postponed. Like the call option, as long as the underlying asset is uncertain, the investment opportunity has value

due to space constraints, the mining operation options and mining development value will be discussed in another article. Here, only the value of mining investment opportunities and investment decisions will be discussed. 3 investment time value and investment decision model the price behavior model of mineral products is usually expressed by Wiener processes. Wiener process is a special form of Markov random process, sometimes called Brownian motion. Set s as how to build the laboratory of mineral product price packaging industry, σ Is the price volatility of mineral products, then the instantaneous expected drift rate μ S and instantaneous variance rate σ The Ito process of 2s2 is DS= μ Sdt+ σ In SDZ (1), Z follows the Wiener process, and ∈ is a random value taken from the standard normal distribution

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