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

  • Murillas Maza, Arantza
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    [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.

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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 2000-01.

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    Date of creation: Jan 2000
    Date of revision:
    Handle: RePEc:ehu:biltok:200001
    Contact details of provider: Postal: Avda. Lehendakari, Aguirre, 83, 48015 Bilbao
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    Order Information: 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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    1. Fama, Eugene F & French, Kenneth R, 1987. "Commodity Futures Prices: Some Evidence on Forecast Power, Premiums,and the Theory of Storage," The Journal of Business, University of Chicago Press, vol. 60(1), pages 55-73, January.
    2. Pindyck, Robert S., 1990. "Irreversibility, uncertainty, and investment," Working papers 3137-90., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    3. Sundaresan, Suresh M, 1984. "Equilibrium Valuation of Natural Resources," The Journal of Business, University of Chicago Press, vol. 57(4), pages 493-518, October.
    4. repec:tpr:qjecon:v:101:y:1986:i:4:p:707-27 is not listed on IDEAS
    5. repec:tpr:qjecon:v:103:y:1988:i:3:p:479-508 is not listed on IDEAS
    6. 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.
    7. 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.
    8. Pindyck, Robert S., 1986. "Irreversible investment, capacity choice, and the value of the firm," Working papers 1802-86., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    9. 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.
    10. 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.
    11. Quigg, Laura, 1993. " Empirical Testing of Real Option-Pricing Models," Journal of Finance, American Finance Association, vol. 48(2), pages 621-40, June.
    12. repec:bla:restud:v:51:y:1984:i:2:p:289-303 is not listed on IDEAS
    13. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
    14. J. Olsen & James Shortle, 1996. "The optimal control of emissions and renewable resource harvesting under uncertainty," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 7(2), pages 97-115, March.
    15. 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.
    16. Cox, John C. & Ross, Stephen A., 1976. "The valuation of options for alternative stochastic processes," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 145-166.
    17. Constantinides, George M, 1978. "Market Risk Adjustment in Project Valuation," Journal of Finance, American Finance Association, vol. 33(2), pages 603-16, May.
    18. Fischer, Stanley, 1975. "The Demand for Index Bonds," Journal of Political Economy, University of Chicago Press, vol. 83(3), pages 509-34, June.
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