Managing financial risk in forestry and the forest products industry
Mendell, Brooks Collat
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This dissertation addresses the topic of financial risk management in forestry and the forest products industry. The research introduces a framework for thinking about risk management in forestry and conducts three studies addressing the current use of and potential applications for derivative securities – specifically, options, futures, forwards, and swaps – in managing financial risk in forestry enterprises. The first study documents the use of derivatives by publicly-traded firms within the forest products industry as of the fiscal year ending in 2002. Of the nineteen largest U.S.-based, publicly traded forest products firms, seventeen specify active derivative positions, mostly used to manage interest rate and foreign currency exposures. The second study tests the potential for using options on forwards in a wood procurement setting using recently available data on actual pulpwood transactions. The results indicate potential for this contract in practice and as a benchmarking tool, but further study of price volatilities is required to improve the robustness of calculated option prices. The third study investigates the potential for cross-hedging urea – a nitrogen-based fertilizer commonly used in forest management – with natural gas futures contracts in the U.S. South. The correlation between urea cash prices and natural gas futures is statistically significant and the cross-hedge reduces the variance associated with out-of-pocket cash urea fertilizer costs. However, on average, the cross-hedge results in approximately 1% greater total out-of-pocket costs associated with the urea fertilizer purchases.