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Title: Structuring Exotic Options Contracts on Water to Improve the Efficiency of Resource Allocation in the Australian Water Market
Contributor(s): Fleming, Euan  (author); Villano, Renato  (author)orcid ; Williamson, Brendon (author)
Publication Date: 2013
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Abstract: The potential economic benefits that options contracts bring to the Murray Valley water market in Australia are assessed. Exotic call option prices are estimated using Black-Scholes and skewness-and-kurtosis-amended Black-Scholes option closed-form pricing methods that are based on mean weekly water prices between 2004 and 2008. While options would result in significant economic benefits through more efficient trade of water on the open market for lower-value crops, there were mixed results from attempts to price them. Results show that use of the standard Black-Scholes formula is likely to undervalue option prices considerably at all but improbably low levels of volatility in water prices. Water option prices are high relative to the net present value of option benefits for recent levels of volatility, which is likely to discourage the development of a water options market. Alternatives to reduce the option prices are discussed. Other potential constraints to the implementation of a water options trading system are outlined.
Publication Type: Journal Article
Source of Publication: Australasian Agribusiness Perspectives, p. 1-24
Publisher: University of Melbourne
Place of Publication: Melbourne, Australia
ISSN: 1442-6951
Field of Research (FOR): 140205 Environment and Resource Economics
140201 Agricultural Economics
140207 Financial Economics
Peer Reviewed: Yes
HERDC Category Description: C1 Refereed Article in a Scholarly Journal
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