Valuing risky projects: option pricing theory and decision analysis
Management Science
Short-Term Variations and Long-Term Dynamics in Commodity Prices
Management Science
Valuation of Commodity-Based Swing Options
Management Science
Using Binomial Decision Trees to Solve Real-Option Valuation Problems
Decision Analysis
Response to Comments on Brandão et al. (2005)
Decision Analysis
A Framework Using Two-Factor Price Lattices for Generation Asset Valuation
Operations Research
Generalized Cox-Ross-Rubinstein Binomial Models
Management Science
American Options Under Stochastic Volatility
Operations Research
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Two-factor stochastic processes have been developed to more accurately describe the intertemporal dynamics of variables such as commodity prices. In this paper we develop an approach for modeling these types of stochastic processes in discrete time as two-dimensional binomial sequences. This approach facilitates the numerical solution of dynamic optimization problems such as investment decision making under uncertainty and option valuation related to commodities. We implement this approach in a two-dimensional lattice format, apply it to two hypothetical valuation problems discussed by Schwartz and Smith, and compare the results to those from simulation-and dynamic-programming-based methods.