option. A purist would probably disagree, arguing that
valuinganoptiononaportfolioofassets(asinthisapproach)
willprovidealowervaluethanvaluingaportfolioofoptions
(whichiswhatthenaturalresourcefirmreallyowns)because
aggregatingassetsthatarelessthanperfectlycorrelatedyields
alowervariance,whichwilllowerthevalueoftheportfolio
of the aggregated assets. Nevertheless, the value obtained
fromthemodelstillprovidesaninterestingperspectiveonthe
determinants of the value of natural resource firms.
Inputs to Option Valuation
Ifwedecidetoapplytheoptionpricingapproachtoestimate
thevalueofundevelopedreserves,wehavetoestimatethe
inputs to the model. In general terms, while the process
resembles theprocess used to valuean individual reserve,
there are a few differences.
- Valueofunderlyingasset.Weshouldcumulateallof
theundeveloped reservesownedbyacompanyand
estimate the value of thesereserves, based on the
priceoftheresourcetodayandtheaveragevariable
costofextractingthesereservestoday.Thevariable
costsarelikelyto behigherforsome reservesand
lowerforothers,andweightingthevariablecostsat
eachreservebythequantityoftheresourceofthat
reserveshouldgiveusareasonableapproximationof
thisvalue.Atleasthypothetically,weareassuming
that the company can decide to extract all of its
undevelopedreservesatonetimeandnotaffectthe
price of the resource. - Exercise price. Forthis input, we should consider
whatitwouldcostthecompanytodaytodevelopall