Valuing Switching Options in International Grain Marketing

An important strategy of commodity trading firms is geographical diversification and vertical integration, often justified with the need for multiple origins. This strategy can be interpreted as a ‘switching option’. Strategic options have become increasingly apparent and important, but, tend to be undervalued using traditional valuation techniques. This paper develops a stochastic real options model to value networks of export elevators. It is applied to soybean trading for shipments from ports in the United States, Brazil and Ukraine. The paper estimates the option value of being able to switch origins in export trades. This value is determined by the distributions of margins and their correlations in a switching option algorithm. The results are roughly comparable to observed recent trade values of representative assets.


Issue Date:
2015-03
Publication Type:
Report
Record Identifier:
http://ageconsearch.umn.edu/record/201309
PURL Identifier:
http://purl.umn.edu/201309
Total Pages:
24
Series Statement:
Agribusiness & Applied Economics Staff Paper
737




 Record created 2017-04-01, last modified 2018-01-23

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