VALUING A TIMBER HARVEST CONTRACT AS A HIGH-DIMENSIONAL AMERICAN CALL OPTION VIA LEAST-SQUARES MONTE CARLO SIMULATION
Article first published online: 10 JUL 2012
Copyright © 2012 Wiley Periodicals, Inc.
Natural Resource Modeling
Volume 26, Issue 1, pages 111–129, February 2013
How to Cite
MEI, B. and CLUTTER, M. L. (2013), VALUING A TIMBER HARVEST CONTRACT AS A HIGH-DIMENSIONAL AMERICAN CALL OPTION VIA LEAST-SQUARES MONTE CARLO SIMULATION. Natural Resource Modeling, 26: 111–129. doi: 10.1111/j.1939-7445.2012.00123.x
- Issue published online: 5 FEB 2013
- Article first published online: 10 JUL 2012
- Received by the editors on 12th July 2011. Accepted 23rd April 2012.
- Forest management;
- option value;
- timber sale;
- wood procurement
Abstract Industrial timberland ownership in the United States has shifted substantially in the last 20 years. Having sold their fee-owned timberlands, forest products companies relied heavily on the open market for raw timber. To reduce their exposure to market risks, however, forest products companies have been using a number of supply chain instruments, such as timber harvest contracts. As these vehicles become increasingly important to the forest industry, it is necessary and important to determine their economic values. In this study, we treated a 3-year timber harvest contract on a 30-year-old loblolly pine plantation as a high-dimensional American call option and calculated its value by the least-squares Monte Carlo simulation technique. The estimated values of such a contract ranged from $1,693/ac to $1,984/ac under two timber price assumptions. With reasonable starting timber prices and strike price in the simulation, random timber prices led to higher contract values. Results from this study can help private landowners, timber brokers, and forest products companies better manage their business risks.