VALUING MULTIPLE-EXERCISE OPTION CONTRACTS: METHODOLOGY AND APPLICATION TO WATER MARKETS

Michele Villinski

No 19960, 2004 Annual meeting, August 1-4, Denver, CO from American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association)

Abstract: Option contracts for water are emerging in some U.S. states as institutional and legal modifications allow water users to devise new mechanisms to increase reliability of water supply in dry years. Option contracts for water, though, are structurally distinct from financial derivatives and often entail a lengthy lifespan and the opportunity for multiple exercise. In this paper I present the framework and results of a finite-horizon, discrete-time, stochastic dynamic programming methodology for valuing multiple-exercise option contracts. I use data from short-term water markets in the Texas Lower Rio Grande to estimate parameters for two different price processes: mean reversion and geometric Brownian motion. Key findings of the analysis include non-zero contract values for both price processes and higher contract values under geometric Brownian motion than under mean reversion.

Keywords: Resource/Energy; Economics; and; Policy (search for similar items in EconPapers)
Pages: 18
Date: 2004
References: View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://ageconsearch.umn.edu/record/19960/files/sp04vi01.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ags:aaea04:19960

DOI: 10.22004/ag.econ.19960

Access Statistics for this paper

More papers in 2004 Annual meeting, August 1-4, Denver, CO from American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) Contact information at EDIRC.
Bibliographic data for series maintained by AgEcon Search ().