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Journal Article

The Valuation of Forestry Resources Under Stochastic Prices and Inventories

Randall Morck, Eduardo Schwartz and David Stangeland
The Journal of Financial and Quantitative Analysis
Vol. 24, No. 4 (Dec., 1989), pp. 473-487
DOI: 10.2307/2330980
Stable URL: http://www.jstor.org/stable/2330980
Page Count: 15
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
The Valuation of Forestry Resources Under Stochastic Prices and Inventories
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Abstract

A contingent claims approach to capital budgeting may be preferable to traditional methods were uncertainty and managers' strategic reactions to changing conditions are important. As an example of such a case, we solve the classical problem of the duration of an investment in forestry resources (i.e., when to cut down the trees) in the general case of stochastic output prices and stochastic natural growth rate and timber inventories. A contingent claims approach is used to value the forestry resources as a function of: (1) stochastic prices and inventories, and (2) an asymmetric, optimal production policy that incorporates the option to halt timber production temporarily.

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