Using the Binomial Model for the Valuation of Real Options in Computing Optimal Subsidies for Chinese Renewable Energy Investments
For renewable energy investments, providing private investors with financial incentives to accelerate their investment is frequently critical. By considering the Chinese context, we use the binomial model to compute the required subsidy that would incentivize investors to optimal immediate exercise of the American-style option embedded in Chinese renewable-energy projects. Further, this paper contrasts the binomial model with the more-laborious Monte-Carlo simulation. By using the same data and reducing the number of stochastic factors to one, we show these two methods have similar outcomes but the easy-to-implement, intuitive binomial method requires substantially less computation.