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

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  • Murillas Maza, Arantza
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    Abstract

    [EN] 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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    Bibliographic Info

    Paper provided by Universidad del País Vasco - Departamento de Economía Aplicada III (Econometría y Estadística) in its series BILTOKI with number 2000-02.

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    Date of creation: 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; irreversibility; recursos pesqueros; opciones reales; flexibilidad de gestión; irreversibilidad; management flexibility;

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    References

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    1. 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.
    2. 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.
    3. Elizabeth Olmsted Teisberg, 1994. "An Option Valuation Analysis of Investment Choices by a Regulated Firm," Management Science, INFORMS, vol. 40(4), pages 535-548, April.
    4. Gonzalo Cortazar & Eduardo S. Schwartz & Marcelo Salinas, 1998. "Evaluating Environmental Investments: A Real Options Approach," Management Science, INFORMS, vol. 44(8), pages 1059-1070, August.
    5. Pindyck, Robert, 1989. "Irreversibility, uncertainty, and investment," Policy Research Working Paper Series 294, The World Bank.
    6. 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.
    7. Cortazar, Gonzalo & Schwartz, Eduardo S, 1993. "A Compound Option Model of Production and Intermediate Inventories," The Journal of Business, University of Chicago Press, vol. 66(4), pages 517-40, October.
    8. 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.
    9. 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.
    10. 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.
    11. 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.
    12. 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.
    13. Schwartz, Eduardo S., 1977. "The valuation of warrants: Implementing a new approach," Journal of Financial Economics, Elsevier, vol. 4(1), pages 79-93, January.
    14. 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.
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