Automatic Generation of Software Components for Real Options Modelling

This paper describes the design and implementation of a software system that, from a high level specification language, generates source code for the valuation of real options. The specification language allows the description at an abstract level and independently of any valuation method specific details, firstly of the flexibility that is present in an investment project in the form of a collection of individual real options, and secondly of the dynamics of the underlying stochastic state variables. The dynamics of the state variables are assumed to be continuous diffusion processes. From these specifications the system generates efficient and reusable software components, which are subsequently combined with software components that implement numerical methods in order for the final real option valuation code to be generated. The system aims at facilitating the rapid development of real options pricing applications and improving management’s ability to perform flexible project analysis under different project structures and stochastic model assumptions.