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Protection Against Wine Price Risks: A Real Option Approach

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  • Viviani, Jean-Laurent

Abstract

Since the beginning of 2006, the federation of wine producers (Inter-Rhône) offers its members (wine producers of the Rhône Valley) protection against wine price risks giving them the option to sell a portion of their production at €80 per hl, regardless of the prevailing market price. This risk management tool has the general features of an American put option with a strike price of 80 €/hl. Two mechanisms are used to reduce the hedging cost: the introduction of a barrier “up and out†, and the option to force producers to implement a non-optimal exercise strategy. We present two pricing models of this option (with and without barrier) followed by an application using the Inter-Rhône wine price data base. The cost of the first protection mechanism (without barrier) is about €10 per hi (i.e., 13.3 % of the current price) but only about €8 for the second (with barrier) representing 10.7 % of the current price. Beyond its traditional role of protection against price fluctuation, the option may also have a positive impact on price levels by stopping panic movements and strengthening the negotiating power of producers. (JEL Classification: Q14, G32)

Suggested Citation

  • Viviani, Jean-Laurent, 2007. "Protection Against Wine Price Risks: A Real Option Approach," Journal of Wine Economics, Cambridge University Press, vol. 2(2), pages 168-186, October.
    • Handle: RePEc:cup:jwecon:v:2:y:2007:i:02:p:168-186_00
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    Cited by:

    1. Kourtis, Apostolos & Markellos, Raphael N. & Psychoyios, Dimitris, 2012. "Wine price risk management: International diversification and derivative instruments," International Review of Financial Analysis, Elsevier, vol. 22(C), pages 30-37.
    2. Raisa Pérez-Vas & Javier Hervés-Estévez & María Dolores Garza Gil & Raquel Fernández-González, 2024. "Valuation of an innovative investment project using real options approach: A case study of a viticulture company in Spain," Agricultural Economics, Czech Academy of Agricultural Sciences, vol. 70(2), pages 91-100.

    More about this item

    JEL classification:

    • Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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