Graduate Thesis Or Dissertation
 

Three studies on the role of uncertainty in the valuation and management of renewable natural resources

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  • These three papers address uncertainty in the management and valuation of renewable natural resources. The first paper develops a model to integrate both stock and price uncertainty to obtain optimal resource levels. The model is an extension of Reed (1974) and shows by proof and by example that when prices can fall below costs, considering stochastic prices is an important element of resource management. The second paper considers the valuation of a United States Forest Service timber harvest contract. The tools and methods of mathematical finance are applied to a timber contract auction to obtain an arbitrage free minimum bid. These methods provide managers with an objective measure to integrate the effects of interest rates, costs, price volatility and contract duration into the contract bid. The third paper fine tunes the exploration of arbitrage-free valuation of natural resource contracts. The paper shows that traditional market-based instruments are not sufficient to hedge contracts on undeveloped resources, such as standing trees in the case of the Forest Service. Rather, a market-based valuation proxy for the undeveloped resource must be obtained. The contribution of this approach is that it shows the consistency of financial theory for use with nonmarket assets. Also, the results provide a framework within which convenience yield measures for holding the developed, or marketable asset, may be determined. This is important because failure to account for convenience yields results in arbitrage opportunities leaving the contract writer exposed to risk from price fluctuations. These papers offer resource managers the rationale and tools for integrating price uncertainty into management plans. They suggest that under uncertainty, harvest levels should be more conservative when prices can fall below harvest costs, and that contract values should be adjusted to accommodate the writer's exposure to lost revenue.
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