What do you do when the binomial cannot value real options?the lSM model

1. Alonso Bonis, Susana
2. Azofra Palenzuela, Valentín
3. Fuente Herrero, Gabriel de la

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Abstract

The Least-Squares Monte Carlo model has emerged as the derivative valuation technique with the greatest impact in current practice. Its implementation combines Monte Carlo simulation, dynamic programming and statistical regression in a flexible procedure suitable for application to valuing nearly all types of corporate investments. The goal of this paper is to show how the LSM algorithm is applied in the context of a corporate investment, thus contributing to the understanding of the principles of its operation.

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