I am doing research on uncertainty analysis and risk assessment for oil field development. For doing economic forecast and valuation I use Real Options theory, which is almost similar to theory used in finance. RO theory is used for valuation of a real, tangible asset etc. My question is as follow:
I have forecast of future cash flows for 20 years from my reservoir, which I get from flow rates and oil price. The flow rates came from Monte Carlo simulation. I compute Present Value (PV) from these future cash flows. In order to use Real Option Valuation (ROV), using Black-Scholes equation, I must know the volatility of the economic returns for 20 years from my reservoir. Knowing this information what could be the appropriate measure of computing volatility of the economic returns from my reservoir?
I have heard of stochastic volatility in finance, however as I am not sure how appropriate it would be to use the stochastic volatility in my case.
The distribution of PV for any particular year is coming out to be gaussian. There is no historical data known.