Pricing expropriation risk in natural resource contracts – A real options approach

We develop a model for pricing expropriation risk in natural resource projects, in particular an oil field. The government is viewed as holding an American-style option to expropriate the oil field, but facing the following three possible expropriation costs: A state-run company may produce oil less cost-efficiently than a private firm,the government may have to pay a compensation to the firm, and an expropriation may trigger lower investor confidence negatively affecting the overall economy. The dynamics of key variables – the spot price, futures prices and volatility – is described by a model proposed and estimated in Trolle and Schwartz (2007). For reasonable parameter values and under market conditions not too different from what has been seen in recent years, the value of the expropriation option can be substantial


Editor(s):
Hogan, William
Sturzenegger, Federico
Published in:
The Natural Resource Trap: Private Investment without Public Commitment
Year:
2010
Publisher:
MIT press
Keywords:
Laboratories:




 Record created 2010-04-24, last modified 2018-03-17

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