Keywords: Renewable resources, fisheries management, options, options trading, harvesting … The basic formula of the CAPM model is:) var() (1) ~, ~ cov() ~ (0 m f m f m e e r r r E where r r P P E P .. 1 Asset Pricing and Option Trading for Harvesting Rights to Renewable Resources Eyjólfur Gu?mundsson, Lecturer, Faculty of Fisheries Studies, University at Akureyri, Iceland and James L. Anderson, Professor, Department of Environmental and Natural Resource Economics, University of Rhode Island, Kingston, RI USA Abstract: This paper discusses …

Abstract: This paper discusses the use of options as a tool to retrieve valuable information on the value and level of risk associated with owning a share in a stock of renewable resource. The objective is to show how theory on options trading can be used to obtain information on the perceived risk of the resource, and to discuss how this market information can be used to enhance the economic performance of the management framework in place. Keywords: Renewable resources, fisheries management, options, options trading, harvesting rights, ITQs. 1. Introduction The commons of the world include renewable resources, such as water, forests, fisheries, land, etc. The tragedy of open access to the commons is all too well known, where the common future of the resource tends to decimate the resource in question (Hardin, 1968). The general trend in history has been one of privatization of common resources after the resource has been over-harvested as common property (Stevenson, 1991). In the last two decades, the trend has been the same for fisheries resources, where more and more fisheries are controlled through individual quota and other rights-based systems (see Wilen, 1985; Hannesson, 1991; Arnason, 1995; Squires, et al ., 1995; and Grafton, et al ., 1996). Privatization of fisheries resources has, in most cases, led to enhanced economic performance of the fishery. Fisheries of New Zealand, Iceland, and the halibut fishery in the US are all examples on how privatization has improved economic efficiency of those fisheries (see Hannesson, 1996, Runolfsson, 1996, Runolfsson, 1999, Homans and Wilen, 1997). With the privatization of common resources, markets for ownership, or harvesting rights, emerge. Those markets should generate valuable information for the resource manager. Financial and commodity markets have developed rapidly over the past century, despite the fact that markets are far from perfect. These markets use futures contracts extensively, and recently various forms of options. These markets provide valuable information to participants in the spot markets for the underlying assets. The most important role of markets for options is not to be a price discovery mechanism but rather: “…Provide valuable information about the volatility and hence the risk of the underlying spot asset” (Chance, 1998). The objective of this paper is to show how options trading can be used to obtain information on the perceived risk of a renewable resource, such as a fish stock. We also discuss how this market information can be used to enhance the economic performance of the management framework. We start by reviewing theoretical work on prices of harvesting rights of renewable resources, and give an overview of classic finance theory on the asset pricing models. We then go on to describe how options markets could be used as a price formation market for harvesting rights of renewable resources. We then discuss how these tools could be used to include additional information for the management process in order to enhance existing management framework. 2. Background The wasteful means of unlimited harvesting of fish stocks has probably been known for a long time. Overharvesting of some sort has occurred, and indeed was a reason for exploration of new fishing grounds in the Middle Ages. In Japan, coastal ocean resources were allocated to specific user groups as early as the 17th century (Yamamoto, 1995). The economic problem of open access fisheries was first formalized by Warming in 1911 and Andersen (1983). More famous is the work of Gordon (1954) and Scott (1955). Initially, the economic discipline suggested that limited entry be used in order to reduce the effort in the fishery (Copes, 1986).

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