Strategic decision making: real options applied to planted forests with Pinus

• Grant number: 20/12169-3
• Support Opportunities: Scholarships in Brazil - Scientific Initiation
• Effective date (Start): December 01, 2020
• Effective date (End): November 30, 2021
• Field of knowledge: Agronomical Sciences - Forestry Resources and Forestry Engineering - Forestry
• Principal Investigator: Danilo Simões
• Grantee: Giovani Caprioli Garcia
• Host Institution: Faculdade de Ciências Agronômicas (FCA). Universidade Estadual Paulista (UNESP). Campus de Botucatu. Botucatu , SP, Brazil

Abstract

In the forest area, investment projects in biological assets are commonly evaluated through the traditional approach, that is, they do not consider associated uncertainties, and especially the flexibilities that can be contemplated throughout the useful life of the asset. Thus, due to the traditional net present value not considering these flexibilities, the objective is to price the underlying asset value using the Brownian model, therefore, valuing an investment project in forests planted with Pinus elliottii through the Real Options Analysis. Deterministic cash flows will be projected in line with the foreshortening forecast. The volatility of the investment project will be estimated from the Monte Carlo simulation, associated with the source of uncertainty of the project, by a stochastic process, that is, through the Fractional Brownian Movement. The strategic flexibilities will consider the Real Options that can be exercised by the decision maker during the useful life of the biological asset. Therefore, the discrete-time model known as the binomial options pricing tree will be adopted. In addition, decision trees will be built, weighing the risk-neutral probabilities of ascending and descending movements, which will allow estimating the aggregated values by the managerial flexibilities, represented by the values of the options.