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Option Pricing by the Nonrenewable Resource Extracting Firm Facing Output Price Uncertainty

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  • Hartwick, John M.

Abstract

We establish a general preference for price uncertainty by the pricetaking, risk neutral, nonrenewable resource extracting firm with orthodox convex extraction costs. Option prices for delivery of a ton at a particular date in the future exceed the expected dollar return from the purchase of the option. The dependence of option price on initial stock size takes a simple form. Other comparative static results are reported.

Suggested Citation

  • Hartwick, John M., 1985. "Option Pricing by the Nonrenewable Resource Extracting Firm Facing Output Price Uncertainty," Queen's Institute for Economic Research Discussion Papers 275197, Queen's University - Department of Economics.
    • Handle: RePEc:ags:queddp:275197
    DOI: 10.22004/ag.econ.275197
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    References listed on IDEAS

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    2. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 8, pages 229-288, World Scientific Publishing Co. Pte. Ltd..
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    4. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
    5. Lewis, Tracy R., 1977. "Attitudes towards risk and the optimal exploitation of an exhaustible resource," Journal of Environmental Economics and Management, Elsevier, vol. 4(2), pages 111-119, June.
    6. John M. Hartwick, 1983. "Learning about and Exploiting Exhaustible Resource Deposits of Uncertain Size," Canadian Journal of Economics, Canadian Economics Association, vol. 16(3), pages 391-410, August.
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