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Option valuation of Philippine forest plantation leases

Published online by Cambridge University Press:  19 May 2004

ROBERTO C. YAP
ROBERTO C. YAP
Affiliation:
Department of Economics, Ateneo de Manila University, Philippines. E-mail: [email protected]
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Abstract

The Philippine forest plantation lease is modelled as an option whose value arises from market uncertainty and the irreversibility inherent in sunk costs required to establish plantations. The value of this option could be a significant factor in the planting decisions of leaseholders. Real options theory could help explain why in spite of the prospects of adequate financial returns, Filipino leaseholders are slow to establish plantations. The opportunity cost of investing is demonstrated to be highly sensitive to uncertainty of the future value of the plantation. Real options analysis is also utilized to evaluate policies intended by the Philippine government to promote plantation development.

Type
Research Article
Information
Environment and Development Economics , Volume 9 , Issue 3 , July 2004 , pp. 315 - 333
Copyright
© 2004 Cambridge University Press

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Footnotes

This paper is based on a chapter of my Ph.D. thesis at University College London. I thank Joseph Swierzbinski, David W. Pearce and Giles Atkinson for helpful comments on earlier versions of this paper. Suggestions from the editor and two anonymous reviewers are also gratefully acknowledged. This paper would not have been possible without the financial support of the Jesuit Philippine Province. The usual disclaimers apply.