Structuring Exotic Options Contracts on Water to Improve the Efficiency of Resource Allocation in the Water Spot Market

Title
Structuring Exotic Options Contracts on Water to Improve the Efficiency of Resource Allocation in the Water Spot Market
Publication Date
2008
Author(s)
Williamson, Brendon
Villano, Renato
( author )
OrcID: https://orcid.org/0000-0003-2581-6623
Email: rvillan2@une.edu.au
UNE Id une-id:rvillan2
Fleming, Euan
Type of document
Conference Publication
Language
en
Entity Type
Publication
Publisher
Australian Agricultural and Resource Economics Society (AARES)
Place of publication
Australia
UNE publication id
une:9309
Abstract
With the current drought in South-Eastern Australia highlighting the scarcity and value of inland Australia's water resources, focus turns to how these resources can be allocated more efficiently. The first major step was taken almost a decade ago with the separation of land and water property rights allowing openly traded water markets. This study assesses the potential economic benefits that options contracts bring to the water market in the Murray Valley water market. Exotic call options are estimated using both Black-Scholes and skewness-and-kurtosis-amended Black-Scholes financial option pricing methods that are based on three years of data on water prices. While the presence of options would result in significant economic benefits in the more efficient trade of water on the open market for lower-value crops, there were mixed results from the attempt to price such options.
Link
Citation
Proceedings of the 52nd Annual Conference of the Australian Agricultural and Resource Economics Society

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