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Valuing Switching Options in International Grain Marketing

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  • Johansen, Stephan
  • Wilson, William
  • Dahl, Bruce L.

Abstract

An important strategy of commodity trading firms is geographical diversification and vertical integration, often justified with the need for multiple origins. This strategy can be interpreted as a ‘switching option’. Strategic options have become increasingly apparent and important, but, tend to be undervalued using traditional valuation techniques. This paper develops a stochastic real options model to value networks of export elevators. It is applied to soybean trading for shipments from ports in the United States, Brazil and Ukraine. The paper estimates the option value of being able to switch origins in export trades. This value is determined by the distributions of margins and their correlations in a switching option algorithm. The results are roughly comparable to observed recent trade values of representative assets.

Suggested Citation

  • Johansen, Stephan & Wilson, William & Dahl, Bruce L., 2015. "Valuing Switching Options in International Grain Marketing," Agribusiness & Applied Economics Report 201309, North Dakota State University, Department of Agribusiness and Applied Economics.
    • Handle: RePEc:ags:nddaae:201309
    DOI: 10.22004/ag.econ.201309
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    References listed on IDEAS

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    1. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    2. Gregory J. McKee & William W. Wilson & Bruce Dahl, 2015. "Risk and Return Trade‐Offs in Partnering Strategies between Co‐ops and IOFs," Agribusiness, John Wiley & Sons, Ltd., vol. 31(1), pages 76-90, January.
    3. Wilson, William W. & Dahl, Bruce L., 1999. "Transnational Grain Firms: Evolution And Strategies In North America," Agricultural Economics Reports 23278, North Dakota State University, Department of Agribusiness and Applied Economics.
    4. Amir H. Alizadeh & Nikos K. Nomikos, 2009. "Shipping Derivatives and Risk Management," Palgrave Macmillan Books, Palgrave Macmillan, number 978-0-230-23580-9.
    5. Gitelman, Gary, 2002. "Use of Real Options in Asset Valuation," The Electricity Journal, Elsevier, vol. 15(9), pages 58-71, November.
    6. Guthrie, Graeme, 2009. "Real Options in Theory and Practice," OUP Catalogue, Oxford University Press, number 9780195380637.
    7. Wilson, William W. & Dahl, Bruce L., 1999. "Transnational Grain Companies: Evolution And Strategies In North America; Summary," Agricultural Economics Reports 23254, North Dakota State University, Department of Agribusiness and Applied Economics.
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    Keywords

    Agricultural and Food Policy; International Relations/Trade;

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