Using Real Options Theory To Grain Reserve Warehouse Investment Analysis

Recently, the grain security once again become the focus of attention of the world.East Africa grain shortages and serious disasters of grain-producing countries like the United States and Russia, rising food prices in the Asia-Pacific region,the increased volatility of the international food price and so on.Food security issues have become essential for national economic and social development strategy objectives.This paper demonstrates the utility of the real options approach to grain reserve warehouse investment analysis.The main objective is to show how to calculate the option values of selected options that may be available to managers of grain reserve warehouse investments. The paper provides an empirical application,which compares an grain reserve warehouse investment using the static Discounted Cash Flow(DCF) model and the real options approach. Because the traditional DCF method can not reflect the adjustments made in the process of project investment strategy,neglecting of the uncertainty,irreversibility,managerial flexibility and delay of the project, and thus There is a big difference with the actual operation of the project.Real option analysis emphasizes the investment changes that may occur in the investment process, and thus more in line with the actual investment operations of the project, provides a more perfect method of investment management for investment decisions. Taking into account the decision-making changes that may occur in the process of grain reserve warehouse building, the option of delaying five years to invest XiangFan state grain reserve warehouse was evaluated using the binomial option pricing model. The analysis show that although the traditional DCF approach accepted the investment as profitable,the option approach provided better results showing that the option was highly valuable if exercised.