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The Valuation of Forestry Resources under Stochastic Prices and Inventories

Published online by Cambridge University Press:  06 April 2009

Randall Morck ,
Eduardo Schwartz  and
David Stangeland
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Abstract

A contingent claims approach to capital budgeting may be preferable to traditional methods where uncertainty and managers' strategic reactions to changing conditions are important. As an example of such a case, we solve the classical problem of the duration of an investment in forestry resources (i.e., when to cut down the trees) in the general case of stochastic output prices and stochastic natural growth rate and timber inventories. A contingent claims approach is used to value the forestry resources as a function of: (1) stochastic prices and inventories, and (2) an asymmetric, optimal production policy that incorporates the option to halt timber production temporarily.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 24 , Issue 4 , December 1989 , pp. 473 - 487
Copyright
Copyright © School of Business Administration, University of Washington 1989

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