Abstract
This work proposes an exercise-dependent real options model for the valuation and optimal harvest timing of a forestry investment in eucalyptus. Investment in eucalyptus is complex, as trees allow for two cuts without replantation and have a specific time and growth window in which they are suitable for industrial processing into paper pulp. Thus, path dependency in the cutting options is observed, as the moment of exercise of the first option determines the time interval in which the second option may be exercised. Therefore, the value of the second option depends on the history of the state variables rather than on its final value. In addition, the options to abandon the project or convert land to another use, are also considered. The option value is estimated by solving a stochastic dynamic programming model. Results are reported for a case study in the Portuguese eucalyptus forest, which show that price uncertainty postpones the optimal cutting decisions. Moreover, optimal harvesting policies deviate from current practice of forest managers and allow for considerable gains.
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Notes
- 1.
An option is the right, but not the obligation, to take some action in the future under specified terms. A call option gives the holder the right to buy a stock at a specified future date (maturity) by a specified price (exercise or strike price). This option will be exercised (used) if the stock price on that date exceeds the exercise price.
- 2.
Any other value that could be obtained for the wood can be used in our model.
- 3.
The initial investment is considered to be given by the land acquisition costs, the plantation costs, and the cost of a maintenance contract for the full length of the project. However, this contract does not include cutting, peeling, and transportation of the harvested wood, which account for the exercise price of the cutting option.
- 4.
This value was obtained through the analysis of the operating costs of the paper pulpwood companies and their installed capacity, and also through inquiries to experts.
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Acknowledgments
The authors would like to thank FCT for the financial support through scholarship BD/12610/03 and project POCI/MAT/61842/04.
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Cunha, M.R., Fontes, D.B.M.M. (2009). A Stochastic Dynamic Programming Model for Valuing a Eucalyptus Investment. In: Advances in Modeling Agricultural Systems. Springer Optimization and Its Applications, vol 25. Springer, Boston, MA. https://doi.org/10.1007/978-0-387-75181-8_16
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