Uncertain Commodity Prices and Informed Sensitivity Analyses

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Abstract

From corporate budgeting to public planning, we hear that commodity prices are uncertain and that when they vary, key investment measures sway with them. However, claiming that commodity prices are outside a firm’s domain of control, corporate decision makers mostly neglect this uncertainty or at best reflect it in naïve sensitivity analyses. Yet, to avoid inferior decisions and loss of value, firms should make decisions that take in the understanding about key uncertain factors. In this paper, we show that the customary practice of analysis with arbitrary “high” and “low” prices is inconsistent with the general understanding about commodity price dynamics and the financial theory. To alleviate this, we suggest a consistent and project-specific sensitivity analysis method that supports valuations and decision making.
Original languageEnglish
Title of host publicationProceedings of the 24th Annual International Real Options Conference
Publication statusPublished - 2 Sep 2021
Event24th Annual International Real Options Conference 2021 - online, Porto, Portugal
Duration: 2 Sep 20214 Sep 2021
http://www.realoptions.org/

Conference

Conference24th Annual International Real Options Conference 2021
Country/TerritoryPortugal
CityPorto
Period2/09/214/09/21
Internet address

Keywords

  • sensitivity analysis
  • Commodity price
  • commodity and energy markets
  • stochastic processes
  • valuation
  • Investment analysis
  • Decision analysis

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