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Protection Against Wine Price Risks: A Real Option Approach*

Published online by Cambridge University Press:  08 June 2012

Jean-Laurent Viviani
Jean-Laurent Viviani
Affiliation:
ISEM, Espace Richter, rue Vendémiaire, Bât. B, CS 19519, 34960 Montpellier Cedex 2, Tel. +33 (0) 4 67 41 90 25, e-mail:jil.viviani@free.fr, jviviani@univ-montpl.fr
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Abstract

Since the beginning of 2006, the federation of wine producers (Inter-Rhône) offers its members (wine producers of the Rhône Valley) protection against wine price risks giving them the option to sell a portion of their production at €80 per hl, regardless of the prevailing market price. This risk management tool has the general features of an American put option with a strike price of 80 €/hl. Two mechanisms are used to reduce the hedging cost: the introduction of a barrier “up and out”, and the option to force producers to implement a non-optimal exercise strategy. We present two pricing models of this option (with and without barrier) followed by an application using the Inter-Rhône wine price data base. The cost of the first protection mechanism (without barrier) is about €10 per hi (i.e., 13.3 % of the current price) but only about €8 for the second (with barrier) representing 10.7 % of the current price. Beyond its traditional role of protection against price fluctuation, the option may also have a positive impact on price levels by stopping panic movements and strengthening the negotiating power of producers. (JEL Classification: Q14, G32)

Type
Articles
Information
Journal of Wine Economics , Volume 2 , Issue 2 , Fall 2007 , pp. 168 - 186
Copyright
Copyright © American Association of Wine Economists 2007

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