Identifying Optimal Storage Period of Onion Using Real Option Value
2017
Kim, M.J., Kyungpook National University, Daegu, Republic of Korea | Kim, H.S., Kyungpook National University, Daegu, Republic of Korea
This paper determines a real option value from waiting to sell onion where storage company's profit is optimal. To determine a real option value, first, a variance ratio test is conducted to test for the existence of mean reversion in onion prices. The results show that price of onion has mean reversion under the 5% significance level. Second, onion’s price process model including mean reversion is estimated. The result shows that mean reversion occurs at a rate of 3.639% weekly. Finally, the cutoff price is determined using estimated price process and a universal lattice model. The optimal cutoff price is 19,600 won in the 2 nd week of August. It is about 3,000 won higher than sample mean price which is 16,512 won. The result indicates that storage companies can receive a higher price when they are waiting to sell onion by 2 nd week of August than selling at harvest.
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