Open AccessNATURAL RESOURCE ECONOMICS UNDER UNCERTAINTY: EFFECT OF FUTURES MARKETS
Author(s) -
Mueller Michael J.
Publication year - 1989
Publication title -
natural resource modeling
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.28
H-Index - 32
eISSN - 1939-7445
pISSN - 0890-8575
DOI - 10.1111/j.1939-7445.1989.tb00077.x
Subject(s) - futures contract , marginal value , economics , non renewable resource , value (mathematics) , microeconomics , resource (disambiguation) , natural resource , natural resource economics , time horizon , option value , econometrics , financial economics , computer science , incentive , ecology , finance , renewable energy , computer network , machine learning , biology
The effects of hedging and time‐dependent price and geological uncertainty on the behavior of a firm exploiting a nonrenewable natural resource are derived. Contrasts in behavior with and without hedging and uncertainty are identified and discussed. Much of the analysis centers on the firm's implicit value of its in situ reserves, marginal user cost. The main result is that time‐dependent uncertainty lowers the implicit value of reserves. Hedging ameliorates this effect somewhat. Under some conditions even with risk reducing hedging, the firm tilts its extraction and development paths toward the present and may also shorten its decision‐making time horizon.