An Application of Expanded Real Option in Investment Decision-making of Iron Ore Resources in Chinese Steel Enterprises

Abstract

Due to the huge fluctuation of iron ore prices and the excessive dependence on overseas iron ore, Chinese steel enterprises have a greater risk of raw material supply. Based on the theory of financial options, this paper expounds the pricing method of real options, and analyses the value composition of real options in iron ore investment projects. Based on Black-Scholes option pricing model and taking the fluctuation of iron ore price as a virtual variable, a decision-making model of iron ore resources investment with expanded real options is constructed. This not only improves the traditional NPV investment decision-making methods, but also improves the efficiency of foreign investment of Chinese steel enterprises.