Contribution to risk assessment in agricultural projects: conjunction of Monte-Carlo and Black-Scholes methods

Abstract

This article treats the way risk is integrated in financial and economic projects analysis, especially agricultural ones. Its objective is not to study the profitability or the risk of a particular project, but it proposes an idea that relates to the methodology itself of risk analysis that would allow comparison of projects profitability when they are at different levels of risk. This will feed into the decision-making process, when it comes to projects that are both profitable and risky. This paper proposes a hybrid indicator that would indicate which of these projects has the best combination of profitability and risk. The development of this indicator is based on real options analysis. It comes from a conjunction between the Monte Carlo simulation and the Black-Scholes option pricing formula for the parametric approach, and from a reverse use of the Datar-Mathews method for the non-parametric approach. For illustration purposes of the calculation of this indicator, a case study will be presented in a subsequent article.

Keywords

• Project analysis
• cost-benefit analysis
• risk analysis
• real options
• Monte Carlo
• Black-Scholes
• Datar-Mathews