Investment Analysis In Agriculture
AbstractRecent developments in investment analysis and their relevancy in agricultural investment assessment are discussed. The Net Present Value model can be modified to incorporate the value of strategic management of an investment into the initial evaluation of that investment. Since these decisions can be modeled as call and put options, the mathematics of financial options has been applied to these investment decisions, and referred to as real options analysis. It is shown how contingent claims analysis can be used to value these real options. Contingent claims analysis uses a risk-free discount rate, since risk is incorporated into option valuation using computed risk-neutral probabilities obtained from a replicating portfolio correlated to the discounted income stream. Many net returns in agricultural activities are correlated with prices of underlying agricultural commodities, suggesting the potential use of contingent claims analysis.
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Bibliographic InfoPaper provided by Cornell University, Department of Applied Economics and Management in its series Staff Papers with number 14763.
Date of creation: 2000
Date of revision:
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- Tomek, William G., 2000. "Commodity Prices Revisited," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 29(2), October.
- Tauer, Loren W., 2000. "Estimating Risk-Adjusted Interest Rates for Dairy Farms," Staff Papers 121149, Cornell University, Department of Applied Economics and Management.
- Tomek, William G., 2000. "Commodity Prices Revisited," Staff Papers 121146, Cornell University, Department of Applied Economics and Management.
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