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Investment planning under uncertainty and flexibility: the case of a purchasable sales contract

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  • Musshoff, Oliver
  • Hirschauer, Norbert

Abstract

Investment decisions are not only characterised by irreversibility and uncertainty but also by flexibility with regard to the timing of the investment. This paper describes how stochastic simulation can be successfully integrated into a backward recursive programming approach in the context of flexible investment planning. We apply this hybrid approach to a marketing question from primary production which can be viewed as an investment problem: should grain farmers purchase sales contracts which guarantee fixed product prices over the next 10 years? The model results support the conclusion from dynamic investment theory that it is essential to take simultaneously account of uncertainty and flexibility.

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Bibliographic Info

Article provided by Australian Agricultural and Resource Economics Society in its journal Australian Journal of Agricultural and Resource Economics.

Volume (Year): 52 (2008)
Issue (Month): 1 (March)
Pages:

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Handle: RePEc:ags:aareaj:117741

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Related research

Keywords: dynamic programming; flexibility; investment; sales contract; stochastic simulation; uncertainty; Agricultural Finance; Risk and Uncertainty;

References

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  1. Odening, Martin & Mu[ss]hoff, Oliver & Hirschauer, Norbert & Balmann, Alfons, 2007. "Investment under uncertainty--Does competition matter?," Journal of Economic Dynamics and Control, Elsevier, vol. 31(3), pages 994-1014, March.
  2. Kuminoff, Nicolai V. & Wossink, Ada, 2005. "Valuing the Option to Convert from Conventional to Organic Farming," 2005 Annual meeting, July 24-27, Providence, RI 19531, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  3. Oliver Musshoff & Norbert Hirschauer, 2008. "Adoption of organic farming in Germany and Austria: an integrative dynamic investment perspective," Agricultural Economics, International Association of Agricultural Economists, vol. 39(1), pages 135-145, 07.
  4. Ky�sti S. Pietola & Robert J. Myers, 2000. "Investment under Uncertainty and Dynamic Adjustment in the Finnish Pork Industry," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(4), pages 956-967.
  5. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November.
  6. Janis M. Carey & David Zilberman, 2002. "A Model of Investment under Uncertainty: Modern Irrigation Technology and Emerging Markets in Water," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 84(1), pages 171-183.
  7. Brennan, Michael J & Schwartz, Eduardo S, 1977. "The Valuation of American Put Options," Journal of Finance, American Finance Association, vol. 32(2), pages 449-62, May.
  8. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
  9. Martin Odening & Oliver Mu�hoff & Alfons Balmann, 2005. "Investment decisions in hog finishing: an application of the real options approach," Agricultural Economics, International Association of Agricultural Economists, vol. 32(1), pages 47-60, 01.
  10. Ibáñez, Alfredo & Zapatero, Fernando, 2004. "Monte Carlo Valuation of American Options through Computation of the Optimal Exercise Frontier," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(02), pages 253-275, June.
  11. Darren Hudson & Keith Coble & Jayson Lusk, 2005. "Consistency of risk premium measures," Agricultural Economics, International Association of Agricultural Economists, vol. 33(1), pages 41-49, 07.
  12. Boyle, Phelim P., 1988. "A Lattice Framework for Option Pricing with Two State Variables," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 23(01), pages 1-12, March.
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  14. Marchant, Mary A. & Murrell, Courtney Paige & Zhuang, Jun, 2004. "Investment Analysis Of Replacing Endophyte-Infected With Endophyte-Free Tall Fescue Pastures," 2004 Annual Meeting, February 14-18, 2004, Tulsa, Oklahoma 34630, Southern Agricultural Economics Association.
  15. Pietola, Kyosti & Myers, Robert J., 1998. "Investment Under Uncertainty And Dynamic Adjustment In Finnish Pork Industry," 1998 Annual meeting, August 2-5, Salt Lake City, UT 20953, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
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Cited by:
  1. Reise, Christian & Liebe, Ulf & Musshoff, Oliver, 2012. "Design of substrate supply contracts for biogas plants," 2012 Conference (56th), February 7-10, 2012, Freemantle, Australia 124428, Australian Agricultural and Resource Economics Society.

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