The Analysis of the Effect of the Farm Revival Program using the Option Pricing Approach

Sewha Lim

Journal of Rural Development/Nongchon-Gyeongje, 2012, vol. 35, issue 01

Abstract: Farm household debts have been the critical problem in the Korean agricultural society. Despite various policies of the government, farm household debts have been steadily increased. The Korean government has conducted “Revival Supporting Project” to reduce farmhouse debts since 2006. Farmers could more easily overcome the difficulties through “Farm Revival Program”. However, it resulted in discontinuance of business. The redemptive right of “Farm Revival Program” is a kind of call option and farmer's buyback arbitrage could be interpreted as the option value. If farmland price increases in the market, farmer's buyback arbitrage would be up by exercising the redemptive right, but the policy cost of the government would increase, too. Therefore, the continuity of business could be threatened. The objective of this study is to estimate the option value of “Farm Revival Program” and examine new policy directions.

Keywords: Agricultural Finance; Farm Management (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:ags:jordng:330550

DOI: 10.22004/ag.econ.330550

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