Alternative Price Dynamics and Valuation of Flexible Strategies

ABSTRACT In this article, we study the optimal operational strategy of production projects. We investigate different underlying price models and determine the optimal barriers of transition to suspension, recovery, or irreversible abandonment of productive activity. We compute probabilities of switching between alternative states and the time spent in each state. Our findings suggest that in moderately volatile markets, different model assumptions lead to minimal variations in project strategy. This insight underscores that tractable model approximations can be strategically sound under certain volatility conditions. Our work significantly advances in this direction by demonstrating when and how model simplifications can be made without sacrificing accuracy.