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

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  • Williamson, Brendon
  • Villano, Renato A.
  • Fleming, Euan M.

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.

Suggested Citation

  • Williamson, Brendon & Villano, Renato A. & Fleming, Euan M., 2008. "Structuring Exotic Options Contracts on Water to Improve the Efficiency of Resource Allocation in the Water Spot Market," 2008 Conference (52nd), February 5-8, 2008, Canberra, Australia 5992, Australian Agricultural and Resource Economics Society.
    • Handle: RePEc:ags:aare08:5992
    DOI: 10.22004/ag.econ.5992
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    References listed on IDEAS

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    Cited by:

    1. Dolores Rey & Alberto Garrido & Javier Calatrava, 2016. "Comparison of Different Water Supply Risk Management Tools for Irrigators: Option Contracts and Insurance," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 65(2), pages 415-439, October.

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    Keywords

    Environmental Economics and Policy; Financial Economics; Research Methods/ Statistical Methods; Resource /Energy Economics and Policy;
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