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Uncertainty and Real Options. Investment and Development of Fishing Resources (II)

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Author Info
Arantza Murillas () (Departamento de Fundamentos del Analisis Economico, Universidad del Pais Vasco, Spain)
Abstract

The irreversibility of the investment expenditures in a fishery and the high degree of uncertainty attaching to the price of the fishing resources make the evaluation of investment opportunity in a fishery particularly difficult. The net-present-value proposes the following rule: "Invest in a project when the present value of its expected cash flows is at least as large as its cost". As the expenditures are largely irreversibles (sunk cost that cannot be recovered) and the fishing investment can be delayed, the previous rule is incorrect. Thus, in this paper it is used an option based approach to capital budgeting because under this technique management have valuable flexibility, giving the firm the opportunity to wait for new information to arrive about prices. The paper presents a model that determines when (at which price level) it is optimum for a firm invest in a fishery and what it is the value of the investment opportunity. The natural growth rate and production function of fishing resources are those of Shaefer model.

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Paper provided by Universidad del País Vasco - Departamento de Economía Aplicada III (Econometría y Estadística) in its series BILTOKI with number 200002.

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Date of creation: 11 Jan 2000
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Handle: RePEc:ehu:biltok:200002

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Postal: Dpto. de Econometría y Estadística, Facultad de CC. Económicas y Empresariales, Universidad del País Vasco, Avda. Lehendakari Aguirre 83, 48015 Bilbao, Spain
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Related research
Keywords: Fishing Resources; Real Options; Management's Flexibility; Irreversibility.;

Find related papers by JEL classification:
Q22 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Fishery
G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

This paper has been announced in the following NEP Reports:

References listed on IDEAS
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  1. McDonald, Robert & Siegel, Daniel, 1984. " Option Pricing When the Underlying Asset Earns a Below-Equilibrium Rate of Return: A Note," Journal of Finance, American Finance Association, vol. 39(1), pages 261-65, March. [Downloadable!] (restricted)
  2. Schwartz, Eduardo S., 1977. "The valuation of warrants: Implementing a new approach," Journal of Financial Economics, Elsevier, vol. 4(1), pages 79-93, January. [Downloadable!] (restricted)
  3. 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. [Downloadable!]
  4. Hull, John & White, Alan, 1990. "Valuing Derivative Securities Using the Explicit Finite Difference Method," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(01), pages 87-100, March. [Downloadable!]
  5. Pindyck, Robert S, 1991. "Irreversibility, Uncertainty, and Investment," Journal of Economic Literature, American Economic Association, vol. 29(3), pages 1110-48, September. [Downloadable!] (restricted)
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  6. Cortazar, Gonzalo & Schwartz, Eduardo S, 1993. "A Compound Option Model of Production and Intermediate Inventories," Journal of Business, University of Chicago Press, vol. 66(4), pages 517-40, October. [Downloadable!] (restricted)
  7. McDonald, Robert L & Siegel, Daniel R, 1985. "Investment and the Valuation of Firms When There Is an Option to Shut Down," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(2), pages 331-49, June. [Downloadable!] (restricted)
  8. Geske, Robert & Shastri, Kuldeep, 1985. "Valuation by Approximation: A Comparison of Alternative Option Valuation Techniques," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(01), pages 45-71, March. [Downloadable!]
  9. 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. [Downloadable!] (restricted)
  10. Courtadon, Georges, 1982. "A More Accurate Finite Difference Approximation for the Valuation of Options," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 17(05), pages 697-703, December. [Downloadable!]
  11. Brennan, Michael J. & Schwartz, Eduardo S., 1978. "Finite Difference Methods and Jump Processes Arising in the Pricing of Contingent Claims: A Synthesis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 13(03), pages 461-474, September. [Downloadable!]
  12. Majd, Saman & Pindyck, Robert S., 1987. "Time to build, option value, and investment decisions," Journal of Financial Economics, Elsevier, vol. 18(1), pages 7-27, March. [Downloadable!] (restricted)
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