Real options analysis of price risk in forestry investments

In this dissertation, real options methodology is developed and applied to the analysis of two problems characterized by the presence of price risk that are frequently encountered in forest management. Two Monte Carlo methods are introduced to obtain problem solutions, and the steps required to implement them are discussed in detail.;The first problem concerns the valuation of timber harvest contracts in the presence of stochastic timber prices, flexibility in harvest timing, and penalty clauses. Harvest contracts are treated as American call options on the value of timber. The application of the proposed methodology is demonstrated on a valuation problem characteristic of harvest contracts sold by the Washington State Department of Natural Resources. Sensitivity analysis and policy implications are presented and discussed.;The second problem concerns the optimal management of an even-aged forest in an environment characterized by volatile timber and carbon prices. The real options methodology is applied to forest stand valuation under three carbon credit scenarios differentiated by adjusting the amount of carbon credits that a forest owner receives from three distinct carbon pools: forest, harvested product, and substitution. The impact of carbon credits on valuation is then outlined, expected bare land values are compared with Faustmann land values, and the results and policy implications are discussed.