In April 2012, Delta Air Lines (Delta) purchased a mothballed oil refinery. We use this case to illustrate when, how, and why vertical integration can hedge input price risk. First, we show that stockholders and creditors expected the move to create wealth. Consistent with their predictions,...

This paper investigates whether convenience yield is an important factor in determining optimal decisions for a forestry investment. The Kalman filter method is used to estimate three different models of lumber prices: a mean reverting model, a simple geometric Brownian motion and the two-factor...

Large water demands by the mining industry are of increasing concern around the world. The cost of a specific water management regulation is studied for an oil sands mining operation in Canada, where restrictions on water withdrawals vary with fluctuations in the river. A stochastic optimal...

This paper investigates the impact of including the risk of fire in an optimal tree harvesting model at the stand level, assuming timber prices follow a mean-reverting stochastic process. The relevant partial differential equation is derived under different assumptions about hedging the risk of...

This paper develops a model of a profit maximizing firm with the option to exploit a non-renewable resource, choosing the timing and pace of development. The resource price is modelled as a regime switching process, which is calibrated to oil futures prices. A Hamilton-Jacobi-Bellman equation is...

Optimal decisions of a firm facing the option of retrofitting its plant to reduce pollution and thereby eliminate the need to purchase emissions allowances are analysed. The decision is treated as a real option with the price of pollution permits following a known stochastic process. The model...