SWITCHING BOUNDARIES FOR FLEXIBLE MANAGEMENT OF NATURAL RESOURCE INVESTMENT UNDER UNCERTAINTY

摘要

This paper studies the optimal management of natural resource investment with flexibility to switch between several operating regimes at specified decision dates in response to uncertain market conditions. The time-dependent switching boundaries that separate regions of different optimal decisions are constructed based on the least-squares Monte Carlo approach. The switching boundaries fully determine the optimal operating strategies and can be used by industry for optimal management of resources projects. Numerical analysis of the switching boundaries provides profound insight into the distinctive features of the optimal operating strategies under different market conditions and project settings. We show that the relative values of the switching and abandonment costs can substantially affect the structure of the switching boundaries.