Determining the Volatility and the Delay Option of a Petrochemical Project in Brazil

The Real Option Theory (OR) offers a modern methodology for the valuation of an investment project because it considers the value of managerial flexibility facing project uncertainties. The present work seeks to study the deferral option value for a polypropylene petrochemical plant investment project. Perhaps the most critical step of OR is the estimation of the project volatility. This work estimates the project volatility for different cases, considering different possibilities for the uncertain variables modeling. The main uncertain variables are the price of the raw material and the price of the product. Three possibilities for price modeling were considered: Brownian Geometric Movement (BGM), Mean Reversion (MR), and Mean Reversion with Jumps (MRJ). A base case was selected for the volatility project and then the value of the deferral option was calculated through numerical approximations of the Black Scholes partial differential equation.