Thus,theinvestmentinanaturalresourceoptionhasapayoff
function similar to a call option.
Inputs for Valuing a Natural Resource Option
Tovalueanaturalresourceinvestmentasanoption,weneed
to make assumptions about a number of variables.
1.Availablereservesoftheresourceandestimatedvalueif
extractedtoday.Sincethisisnotknownwithcertaintyatthe
outset,ithas to be estimated.In an oiltract, forinstance,
geologistscanprovidereasonablyaccurateestimatesofthe
quantityofoilavailableinthetract.Thevalueofthereserves
is then the product of the estimated reserves and the
contribution(marketpriceoftheresourceminusvariablecost
of extraction) per unit of reserve.
2.Estimatedcostofdevelopingtheresource.Theestimated
costofdevelopingtheresourcereserveistheexercisepriceof
theoption.Inanoilreserve,thiswouldbethefixedcostof
installingtherigstoextractoilfromthereserve.Withamine,
it would be the cost associated with making the mine
operational.Sinceoilandminingcompanieshavedonethis
beforeinavarietyofsettings,theycanusetheirexperienceto
come up with a reasonable measure of development cost.
- Time to expirationof the option.The life of a natural
resourceoptioncanbedefinedinoneoftwoways.First,if
theownershipoftheinvestmenthastoberelinquishedatthe
endofafixedperiodoftime,thatperiodwillbethelifeofthe
option.Inmanyoffshoreoilleases,forinstance,theoiltracts
areleasedtotheoilcompanyforafixedperiod.Thesecond
approachisbasedontheinventoryoftheresourceandthe