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

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  • Murillas Maza, Arantza

Abstract

[EN] The valuation of development opportunity of a fishery is made particularly difficult by the high degree of uncertainty attaching to the price of the fishing resource. The net-present-value and other discounted cash-flows cannot properly capture the management s flexibility, thus they may understate its value. The motivation for using an option-based approach to capital budgeting arises from its potential to conceptualize and quantify the management s flexibility. Under this technique, management may have valuable flexibility to alter its operating strategy, options to shut down (and restart) fishery development. Real Options valuation has traditionally been applied in the area of natural resource developments different from fishing resources. The paper presents a general bioeconomic model for the value of a fishery. It suffices to determine not only the value of the fishery when open and closed, but also the optimal policy for opening, closing and for setting the harvest rate.

Suggested Citation

  • Murillas Maza, Arantza, 2000. "Uncertainty and Real Options. Investment and Development of Fishing Resources (I)," BILTOKI 1134-8984, Universidad del País Vasco - Departamento de Economía Aplicada III (Econometría y Estadística).
    • Handle: RePEc:ehu:biltok:5844
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    File URL: https://addi.ehu.es/handle/10810/5844
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    1. Eugene F. Fama & Kenneth R. French, 2015. "Commodity Futures Prices: Some Evidence on Forecast Power, Premiums, and the Theory of Storage," World Scientific Book Chapters, in: Anastasios G Malliaris & William T Ziemba (ed.), THE WORLD SCIENTIFIC HANDBOOK OF FUTURES MARKETS, chapter 4, pages 79-102, World Scientific Publishing Co. Pte. Ltd..
    2. J. Olsen & James Shortle, 1996. "The optimal control of emissions and renewable resource harvesting under uncertainty," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 7(2), pages 97-115, March.
    3. 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 261-265, March.
    4. 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 331-349, June.
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