The Valuation of Forestry Resources under Stochastic Prices and Inventories

Randall Morck, Eduardo Schwartz and David Stangeland

Journal of Financial and Quantitative Analysis, 1989, vol. 24, issue 4, 473-487

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.

Date: 1989
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