 Protection Against Wine Price Risks: A Real Option Approach*Journal of Wine Economics, 2007, vol. 2, issue 2, 168-186 Abstract: Since the beginning of 2006, the federation of wine producers (Inter-Rhône) offers its members (wine producers of the Rhône Valley) protection against wine price risks giving them the option to sell a portion of their production at €80 per hl, regardless of the prevailing market price. This risk management tool has the general features of an American put option with a strike price of 80 €/hl. Two mechanisms are used to reduce the hedging cost: the introduction of a barrier “up and out”, and the option to force producers to implement a non-optimal exercise strategy. We present two pricing models of this option (with and without barrier) followed by an application using the Inter-Rhône wine price data base. The cost of the first protection mechanism (without barrier) is about €10 per hi (i.e., 13.3 % of the current price) but only about €8 for the second (with barrier) representing 10.7 % of the current price. Beyond its traditional role of protection against price fluctuation, the option may also have a positive impact on price levels by stopping panic movements and strengthening the negotiating power of producers. (JEL Classification: Q14, G32) Date: 2007 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:cup:jwecon:v:2:y:2007:i:02:p:168-186_00 Access Statistics for this article More articles in Journal of Wine Economics from Cambridge University Press Cambridge University Press, UPH, Shaftesbury Road, Cambridge CB2 8BS UK. |
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