Real options valuation of forest plantation investments in Brazil

Markku Kallio, Markku Kuula and Sami Oinonen

European Journal of Operational Research, 2012, vol. 217, issue 2, 428-438

Abstract: In this paper, we consider investments in eucalyptus plantations in Brazil. For such projects, we discuss real options valuation in the place conventional methods such as IRR or NPV, possibly with CAPM. Traditionally, real options valuation assumes complete markets and neglects market imperfections. Yet, market frictions, such as transaction costs, interest rate spreads, and restricted short positions, can play an important role. We extend real options valuation to allow incomplete and imperfect markets. The value is obtained as a competitive price, given markets of competing investment opportunities, such as real and financial assets. Under perfect and complete markets, such valuation method is consistent with conventional real options theory. Stochastic programming and standard software is used for valuation of eucalyptus plantations. We estimate the underlying interdependent diffusion processes of stock market, interest rates, exchange rates and pulpwood price, and derive novel expressions of stochastic integrals to be employed in scenario generation for discrete time stochastic programming.

Keywords: Investment analysis; Real options; Stochastic programming; Imperfect markets; Plantation forests (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:217:y:2012:i:2:p:428-438

DOI: 10.1016/j.ejor.2011.09.040

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