Computing Capacity Value
Goal: Production value with capacity K
- Compute uncapacitated value based on CAPM:
- St= e-r(T-t)?cTSTdF(ST)
- where cT=margin,F is distribution (with risk aversion),
- r is rate from CAPM (with risk aversion)
- Assume St now grows at riskfree rate, rf ; evaluate as if risk neutral:
- Production value = St - Ct= e-rf(T-t)?cTmin(ST,K)dFf(ST)
- where Ff is distribution (with risk neutrality)