What is the relevance of option pricing for forest valuation in New Zealand?
AbstractThree different option value approaches are used to estimate the value of a typical New Zealand plantation stand, under the assumption that log prices follow a random walk. Crop values are compared with the Faustmann value, the benchmark for forest valuation in New Zealand. The increase in forest value can be substantial when log prices are low and close to the exercise cost. Gains quickly diminish and become small, both as an absolute difference and as a percentage of forest value, as price increases. However, results are very sensitive to the log price model adopted. Assuming log prices are mean reverting gives higher values than Faustmann for all log prices. Stochastic Dynamic Programming (SDP) and Binomial Option Pricing (BOP) give very similar results. They evaluate the same harvest/defer harvest/never harvest options. A new Abandonment Adjusted Price approach gives results that have a similar pattern but are consistently lower than SDP and BOP. This approach only considers whether to harvest or not in the optimal year and does not allow the option of deferring harvest. At the present time, option valuation approaches have limited relevance for the practice of forest valuation in New Zealand. Practical issues (determination of the log price model, estimation of volatility, allowing for multiple log grades and modelling at the estate-level) need to be addressed before option value approaches can be routinely used for forest valuation.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Forest Policy and Economics.
Volume (Year): 12 (2010)
Issue (Month): 4 (April)
Contact details of provider:
Web page: http://www.elsevier.com/locate/forpol
Forest valuation Option value Stochastic prices Rotation age;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Morck, Randall & Schwartz, Eduardo & Stangeland, David, 1989. "The Valuation of Forestry Resources under Stochastic Prices and Inventories," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(04), pages 473-487, December.
- repec:ltr:wpaper:1989.01 is not listed on IDEAS
- Gong, Peichen & Löfgren, Karl Gustaf, 2007. "Market and welfare implications of the reservation price strategy for forest harvest decisions," Journal of Forest Economics, Elsevier, vol. 13(4), pages 217-243, November.
- Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
- Gjolberg, Ole & Guttormsen, Atle G., 2002. "Real options in the forest: what if prices are mean-reverting?," Forest Policy and Economics, Elsevier, vol. 4(1), pages 13-20, May.
- Insley, Margaret, 2002. "A Real Options Approach to the Valuation of a Forestry Investment," Journal of Environmental Economics and Management, Elsevier, vol. 44(3), pages 471-492, November.
- Thomas A. Thomson, 1992. "Optimal Forest Rotation When Stumpage Prices Follow a Diffusion Process," Land Economics, University of Wisconsin Press, vol. 68(3), pages 329-342.
- Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
- Harry R Clarke & William J. Reed, 1989.
"The Tree-Cutting Problem in a Stochastic Environment: The case of Age Dependent Growth,"
1989.01, School of Economics, La Trobe University.
- Clarke, Harry R. & Reed, William J., 1989. "The tree-cutting problem in a stochastic environment : The case of age-dependent growth," Journal of Economic Dynamics and Control, Elsevier, vol. 13(4), pages 569-595, October.
- Reed, William J., 1993. "The decision to conserve or harvest old-growth forest," Ecological Economics, Elsevier, vol. 8(1), pages 45-69, August.
- Bruce McGough & Andrew J. Plantinga & Bill Provencher, 2004.
"The Dynamic Behavior of Efficient Timber Prices,"
University of Wisconsin Press, vol. 80(1), pages 95-108.
- Manley, Bruce, 2013. "How does real option value compare with Faustmann value in the context of the New Zealand Emissions Trading Scheme?," Forest Policy and Economics, Elsevier, vol. 30(C), pages 14-22.
- Tee, James & Scarpa, Riccardo & Marsh, Dan & Guthrie, Graeme, 2010. "A Binomial Tree Approach to Valuing Fixed Rotation Forests and Flexible Rotation Forests Under a Mean Reverting Timber Price Process," 2010 Conference, August 26-27, 2010, Nelson, New Zealand 96836, New Zealand Agricultural and Resource Economics Society.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.