Option Pricing by the Nonrenewable Resource Extracting Firm Facing Output Price Uncertainty

John M. Hartwick and David Yeung

Working Papers from Queen's University, Department of Economics

Abstract: We establish a general preference for price uncertainty by the price taking, risk neutral, nonrenewable resource extracting firm with orthodox convex extraction costs. Option prices for delivery of a ton at a particular date in the future exceed the expected dollar return from the purchase of the option. The dependence of the option price on initial stock size takes a simple form.

Date: Written

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Persistent link: http://EconPapers.repec.org/RePEc:qed:wpaper:590

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