1887

n African Finance Journal - Valuation of a hydro-electric power project in emerging markets : an application of real options

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Abstract

We apply a contingent-claims technique and demonstrate how to value an emerging market hydro electric power investment under uncertainty. The investment project depends on reliable weather conditions and the capacity of a river to drive the water turbines. Uganda's Bujagali dam project located at the source of the Nile River is the focus of our study. We identify four mutually-exclusive real options and incorporate the correlation of returns on rainfall and cash flows as well as a premium for lack of transparency in the estimation of project risk. We document a leverage effect and a volatility effect on project value.

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/content/finj/14/1/EJC33773
2012-01-01
2016-12-06
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