Real options under uncertainty current, only, exercise, structure, produce

transferpricing

Hi ,

R36 Alternative Investments Portfolio Management
P.56 Example 9 Solution to 3:

"Oil producers hold valuable real options to produce or not to produce.
They may not exercise this option unless sopt prices begin to rise.
Production may occur only if futures prices are below the current spot price,
which is associated with a downward-sloping term structure of futures prices."

anyone can explain the second part above sentence ?

"Production may occur only if futures prices are below the current spot price,
which is associated with a downward-sloping term structure of futures prices."

thanks in advance!

mar350

Many thanks, bpdulog, me.tega!!

I can understand the concept!!!

mcmc

If you are an oil producer and you can sell oil at $90 per barrel in the spot market while the 30 day future price is $80 per barrel. You would prefer to produce and sell as much as you can now instead of locking yourself in at $80. If however the spot price is $80 and 30 day futures price is $90, you will stop all production or prefer to store and sell at the futures price that the spot.