Abstract

MILANESI, Gastón; WOITSCHACH, Guillermo B. M  and  BROZ, Diego R. Applying the theory of real options to the optimal timing of timber harvests. Rev. Fac. Cienc. Agrar., Univ. Nac. Cuyo [online]. 2012, vol.44, n.2, pp.65-78. ISSN 1853-8665.

We present here a real options approach as a tool for strategic decision-making in the forestry sector. We consider, in particular, an exotic option known as a knock-in barrier option. We use this approach to determine the optimal timing of harvests. The optimal time is determined by comparing at each period, the cash flow corresponding to each node (FF_ij(t)) in a binomial lattice with the expected value in the next year (X_t+1xe^-r?t ). The traditional NPV indicates, in an hypothetical context analyzed in the paper, that the largest present value is obtained at the tenth year of standing. The real options approach championed here, instead, indicates that the highest value is at the eighteenth year of standing.

Keywords : Real options; Cash flow; Binomial; Lattice; Optimal timing.

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