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Evaluating cash benefits as real options for a commodity producer in an emerging market

Author

Listed:
  • Fernando Antonio Lucena Aiube

    (Puc Rio)

  • Edison Americo Huarsaya Tito

    (Puc Rio)

Abstract

The amount of cash a firm should maintain is an old problem tackled by finance literature. The recent advances in finance, mainly in the derivatives area, has opened the opportunity to revisit this subject. Cossin and Hricko (2004) studied the benefits of cash holdings using the Real Options approach. We follow their ideas extending the problem to a specific commodity producer firm in an emerging economy. We evaluate the benefits considering that raising capital takes time (timing benefit) and also the benefit of avoiding the issue of securities at unfavorable moments (underpricing benefit). We use numerical procedures to solve the problem. Despite the fact that the results are not totally intuitive, we verify that the timing benefit is much more relevant than that of avoiding the underpricing benefit and that firms in emerging economies have greater advantage holding cash than those in developed economies. There is empirical evidence of this last result in the literature.

Suggested Citation

  • Fernando Antonio Lucena Aiube & Edison Americo Huarsaya Tito, 2009. "Evaluating cash benefits as real options for a commodity producer in an emerging market," Brazilian Review of Finance, Brazilian Society of Finance, vol. 7(3), pages 361-375.
    • Handle: RePEc:brf:journl:v:7:y:2009:i:3:p:361-375
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    References listed on IDEAS

    as
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    Keywords

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    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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