William Wilson - Thesis Committee

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Real Option Analysis of Primary Rail Contracts in Grain Shipping
(North Dakota State University, 2017) Landman, Daniel
Grain shipping for a country elevator involves many sources of risk and uncertainty. In response to these dynamic challenges faced by shippers, railroad carriers offer various types of forward contracting instruments and shuttle programs. Certain contracting instruments provide managerial flexibility by allowing shippers to sell excess railcars into a secondary market. The purpose of this study is to value this transferability as a European put option. A framework is developed around a material requirement planning schedule and real option analysis to represent the strategic decisions facing a primary shuttle contract owner. Monte Carlo simulation is incorporated with a stochastic binomial option pricing model to value the transfer option. A sensitivity analysis is then conducted to determine the impact of key input variables. This study provides insights about railcar ordering strategy, and the implications of transferable rail contracts for shippers and carriers.
Optimization of Soybean Buying Strategies Using Derivatives
(North Dakota State University, 2017) Moody, Nathaniel David
The portfolio model of hedging framework, based off Markowitz (1952), is used to determine the best mix of futures, basis, and option contracts to hedge a soybean purchase from PNW 28 weeks in to the future. Eighteen options are incorporated including in-the-money, at-the-money, and out-of-the-money call and puts with different expiration dates. Futures and option pricing data is extracted from ProphetX from November of 2013 to December of 2016. Expected utility objectives including mean-variance, CVaR, Mean-CVaR, and Mean-CVaR with copula are maximized using linear programming optimization methods. A two stage model is built to simulate hedging scenarios while measuring various statistics. Under high risk aversion, a standard futures hedge performs the best. Buyers with lower risk aversion should explore option strategies. In-the-money calls, collars, strangles, and short butterfly strategies all perform well.
Valuation of Licensing Agreements in Agriculture Biotechnology
(North Dakota State University, 2016) Churchill, Jason
As demand for agricultural commodities expands throughout the world, competitors are finding it advantageous to form strategic partnerships. Firms seek to collaborate in an organized effort to advance technology as quickly as possible. This thesis develops a discounted cash flow model embedded with real options and Monte Carlo simulation to value the most common rights, restrictions, and options found in agriculture biotechnology license agreements. Due to the complexity and uncertainty involved in the incubation of new technology, the incorporation of flexibility provided through real options is paramount to the analysis. Implications from changes in critical variables are analyzed as to how they may affect decision making. This thesis establishes an extensive background and analysis of licensing intellectual property in agriculture biotechnology, valuation techniques for intellectual property licenses, as well as tactics for quantifying specific terms. Thus creating a framework for the valuation of agriculture biotechnology licensing agreements.
Rail Car Trip Transit Time and the Effects on Grain Trading Company Profits
(North Dakota State University, 2016) Gesme, Nathaniel
This examines the logistic process of a grain trading company, and how logistics affect profits. Trip transit time is the amount of times a shuttle train moves back and forth from an elevator and a destination. In the years prior to the 2013/ 2014 crop year, shuttles moved between elevators and destination nearly 3 times in a given month. When transit time dropped in 2013, this created a unique situation to be examined. It changed how grain trading companies needed to alter strategy to maintain a profit. The decrease in trip transit time affected how rail cars moved, but also altered the price paid for freight. In conclusion, this thesis discovered that strategies on rail cars altered between the years. The strategies created opportunities for grain trading companies to change the structure of profits. This thesis also creates new opportunities for future research.
Hedging Default and Price Risks in Commodity Trading
(North Dakota State University, 2016) Kimura, Norifumi
Many risk factors exist in the commodity markets, especially those related to price and quantity. Recently, the risk of counterparty default has been increasing. The purpose of this study is to develop a portfolio-hedging model to hedge both price and default risks using exchange traded commodity futures and option contracts. Two approaches are taken to determine the optimal hedge ratios (HR) using futures and options: an analytical approach that mathematically derives closed-form mean-variance (E-V) maximizing solutions, and an empirical approach that uses stochastic optimization and Monte Carlo simulation under mean-value-at-risk (E-VaR) framework. Based on the analytical approach, we proved that utility-maximizing solutions exists. The empirical approach suggests that naïve HR (HR of one) leads to a suboptimal result. The minimum-variance, E-V, and minimum VaR objective functions generated the same optimization results. Additionally, a copula is applied instead of a linear correlation, and resulted a higher put option HR.
The Risks Associated with Barley Production in North Dakota
(North Dakota State University, 2016) Nelson, Bernt Louis
The market for barley has shifted from a demand for exports and livestock feed, to a demand for human food and alcohol production. Due to the crop qualities required for malting in the alcohol industry, barley is perceived to be a more financially risky crop to grow in comparison to other crops. Monte Carlo simulation was used to estimate the distributions of net return to labor and management for barley, hard red spring wheat, corn, soybean, and canola in the primary, North Central, and transitional, Central, crop reporting districts of North Dakota. Stochastic efficiency with respect to a function was used to rank the distributions based on a farm manager’s risk preferences. Results indicate that barley is not as risky to grow as farm managers perceive. However, soybeans were the dominant crop. Corn is dominant crop when a decision maker is risk neutral, but quickly diminishes as risk aversion increases.
Costs and Risks of Testing and Blending for EAA in Soybeans
(North Dakota State University, 2015) Hertsgaard, David Jorgen
Soybean quality is typically measured by protein values. Essential Amino Acids (EAA) and Critical Amino Acid Value (CAAV) provide alternative measures of valuing soybeans. The following thesis analyzes the effects of testing soybeans for specific quality traits. A dual-marketing system is developed to analyze the costs and risks that may arise for grain handlers to segregate soybeans into high-quality and low-quality grain flows based on various importer purchasing strategies. A stochastic optimization model is used to determine the optimal testing locations within the dual-marketing system in order to minimize costs and risks to grain handlers. The model includes a blending component to determine the optimal blending from different locations with various quality distributions. The thesis provides a framework for grain handlers to make decisions based on the international importers’ various and numerous purchasing strategies.
A Multivariate Approach to Forecasting Dairy Imports
(North Dakota State University, 2014) Laufmann, Regina
The global economy is becoming more connected with every passing year. Developing countries continue to lift themselves out of poverty and their markets are hungry for the opportunity to trade goods with nations all over the world. This is true in dairy markets, and it is a good time for domestic producers to set their sights on international markets. Domestic companies want to have a tool they can use to determine where the demand is not only strong today but will remain strong in the future. In this paper a model is developed to forecast demand in China, the world’s top dairy importing nation. The accuracy of the model is checked. While forecasts will never be completely accurate the multivariate approach used in this paper shows promise for the helpfulness of such models to firms looking to evaluate foreign markets.
The Impact of the Panama Canal Expansion on U.S. Soybean Exports
(North Dakota State University, 2014) Gallagher, Brian Paul
The objective of this study was to evaluate the impact of the Panama Canal Expansion on the flow of soybeans from producing regions in the U.S. to its ports for export. Specific objectives of this study were to determine the toll rate at which the Panama Canal Authority will maximize their toll revenues for soybeans transiting the canal, and to analyze the impact of the canal expansion on soybean shipments from U.S. producing regions to ports for export. To conduct this study a spatial optimization model was developed. The model minimizes all transportation costs associated with the transportation of soybeans. Major findings were that the expansion of the Panama Canal will increase shipments out of the Gulf through the canal, and reduce the overall costs of shipping by 5 percent. Domestic transportation proved to be somewhat insensitive to changes in the toll rate.
Estimating U.S. Residential Demand for Fuelwood in the Presence of Selectivity
(North Dakota State University, 2014) Daly, Ryan Michael
Residential energy consumers have options for home heating. With many applications, appliances, and fuel types, fuelwood used for heating faces stiff competition in modern society from other fuels. This study estimates demand for domestic fuelwood. It also examines whether evidence of bias exists from residential homes choosing to use fuelwood. The use of OLS as an estimator will yield biased results if such selectivity exists. Selectivity is addressed with a Heckman (1979) two-step procedure; bias in fuelwood demand estimation using OLS is reduced. Non-wood energy prices and income are major determinants of fuelwood demand. Geographical regions and urbanization confirm results from prior studies.
A Historical Analysis of Natural Gas Demand
(North Dakota State University, 2014) Dalbec, Nathan Richard
This thesis analyzes demand in the US energy market for natural gas, oil, and coal over the period of 1918-2013 and examines their price relationship over the period of 2007-2013. Diagnostic tests for time series were used; Augmented Dickey-Fuller, Kwiatkowski–Phillips–Schmidt–Shin, Johansen cointegration, Granger Causality and weak exogeneity tests. Directed acyclic graphs were used as a complimentary test for endogeneity. Due to the varied results in determining endogeneity, a seemingly unrelated regression model was used which assumes all right hand side variables in the three demand equations were exogenous. A number of factors were significant in determining demand for natural gas including its own price, lagged demand, a number of structural break dummies, and trend, while oil indicate some substitutability with natural gas. An error correction model was used to examine the price relationships. Natural gas price was found not to have a significant cointegrating vector.
Structural Changes in North American Fertilizer Logistics
(North Dakota State University, 2014) Shakya, Sumadhur
Nitrogen-based fertilizer industry in United States is undergoing major changes the demand for which is primarily driven by agriculture. Traditionally, this industry sources anhydrous ammonia through imports from Canada and U.S.-Gulf, the latter comprises bulk of imports, or produces domestically to be supplied as is or converted into urea or UAN variations of nitrogen-based fertilizer with various combinations with other minerals. With change in composition of crops and increasing acreage of crops that are fertilizer intensive, there is an increased demand for nitrogen-based fertilizer in order to promote foliar growth as a standalone form, for example Urea, or in combination, for example Di-ammonium phosphate (DAP). Second compelling reason for change in industry is reduction in prices of natural-gas, in part due to oil exploration, that makes it cheaper to produce anhydrous ammonia domestically. Anhydrous ammonia is perquisite for making other types of nitrogen-based fertilizer and highly energy intensive. Thus, lower natural-gas prices provide incentive for domestic firms to either expand existing fertilizer plants or opens up the possibility of new entrants. Many companies/firms have recently announced their plans to expand existing plants or open new units, exerting competitive pressure on an industry that already has lot of surplus capacity but highly competitive in terms of production costs and technology used. It is to be noted that natural-gas prices are volatile; therefore, any commitment to expand or open new plant is subject to volatility in demand, natural-gas prices, and import price of fertilizers. The purpose of this dissertation is to analyze spatial competition among U.S. nitrogen-based fertilizer plants and their respective market boundaries. This dissertation also derives the structure of the supply chain for nitrogen-based fertilizer in the United States (at macro level); and the stochastic spatial-optimization model to account for risk in random variables. Locational information is used to account for spatial nature of problem, and linear and mixed-integer based optimization techniques are applied to arrive at current and most likely future cases. Combination of linear optimization, and mixed-integer, and geographical information systems helps in determining regional areas where competition is expected to be ruinous and most intense; and provide insights on viability of newly announced fertilizer plants that are most likely to be successful and significantly impact the structure of overall supply chain.
Determining the Optimal Commodity and Hedge Ratio for Cross-Hedging Jet Fuel
(North Dakota State University, 2014) Turner, Peter Alistair
Airlines are exposed to risks in swings in the price of jet fuel. While there are many different options that they can use to hedge this risk, airlines often underutilize them. This study establishes the minimum variance hedge ratio for an airline wishing to hedge with futures, while also establishing the best cross-hedging asset. Airlines hedging with futures would create the most effective hedge by using 3-month maturity contracts of heating oil. 3- Month maturity contracts are slightly more effective as hedging tools than the next month, but beyond the 3-Month veil, increased maturity makes heating oil less effective as a cross hedging tool.
Risk Management Strategies for Commodity Processors
(North Dakota State University, 2013) Chen, Songjiao
Recent years have witnessed an increase in agricultural commodity price volatility. This thesis analyzes different models to derive optimal hedge strategies for commodity processors, with two components addressed. One is the dependence structure and joint distribution among inputs, outputs, and hedging instruments that impact hedging effectiveness. The second refers to different procurement and sales scenarios a processor may encounter. A domestic flour mill company is used to demonstrate alternative hedging strategies under different processing scenarios. Copula is a relatively new method used to capture flexible dependence structure and joint distribution among assets. The applications of copulas in the agricultural literature are recent. This thesis integrates the concept of copula and widely studied risk measurement Value at Risk (VaR) to derive the optimal risk management strategy. Mean-VaR with copula calculation is shown to be an efficient and confident approach to analyze empirical studies.
Game Theory Approach to the Vertical Relationships for U.S. Containerized Imports
(North Dakota State University, 2013) Liu, Qing
Multi-player interactions and vertical relationships in the U.S. containerized-import shipment market are investigated using game theory approaches. Bi-level programming problems (BLPP) are built to capture the hierarchy structure of the container shipping industry, whereas the ocean carriers (OC) are considered as the market leader. For a case study with five players from several levels of the shipment chain, 16 BLPPs are built to analyze the 32 coalition possibilities. Two routes are compared: The West Coast route (WCR) includes one terminal (P1) and one railroad (R); the East Coast route (ECR) includes a second terminal (P2) and the Panama Canal (PC). The impact of Panama Canal expansion is investigated by comparing scenarios with different assumptions of vessel size. Capacity constraints at port terminals are also analyzed by assuming different capacity levels. The grand coalition of the five players is found to be very unstable because of the unavoidable competition within the coalition; hence, following games are further created, supposing the grand coalition could not form. Model results indicate the OC prefers to form an East Coast Coalition (ECC) with East Coast players if the grand coalition could not form. Sensitivity analyses on some parameter values for the grand coalition and for the ECC bring some interesting findings. With higher cargo values, the WCR becomes more appealing because of its quicker delivery time and lower inventory costs compared with the ECR. The Panama Canal expansion will improve market power and profit shares for the East Coast players if the canal operator could increase its competitive price more than the increase of costs. Generally, a player will gain more market power if its cost could be reduced. A player's upper bound rate is a reflection of its relative market power. But in a complicated market characterized with various cooperation-competition strategies and an ambiguous definition of partners and competitors, the impact of a player's upper bound rate on the market power structure could not be easily explained. For future research, the challenge mainly lies on the large number of BLPPs that need to be constructed and solved in order to study more players.
Switching Options: The Value of Flexibility Provided by Geographical Diversification
(North Dakota State University, 2014) Johansen, Stephan Wegerle
The thesis develops a Monte Carlo simulation model with real options to value agricultural-commodity-trading firms' physical assets in relation to their existing networks of physical assets. The option value measured is the flexibility provided by switching options. This value can guide individual trading firms from an asset-light strategy towards more asset-medium/heavy and more profitable strategies. The thesis explores the value drivers for the optionality to switch origin locations. Optimal asset networks position traders to smooth imbalances in the market through spatial arbitrage. Further, the implications for contracting parts of the capacity, as well as how they affect the option value, are analyzed. The thesis provides a framework to understand the reasons behind recent mergers and acquisitions in the industry. The commodity analyzed in this thesis is soybeans across the United States, Ukraine, and Brazil with China as the destination market.
Developing a Model to Value Germplasm Using Real Options
(North Dakota State University, 2013) Simonson-Paschke, Marit
With many varieties of germplasm being developed, it is imperative to the industry that firms decide on a valuation method. This need to include looking at traits of the germplasm, the risk and uncertainty of expected returns associated with a varieties' development and release. The purpose of this thesis is to determine the option value of developing germplasm using the real options approach. The value gained of the variety will be measured and used as a decision factor in the determining the value of the germplasm at different development phases. This approach helps managers decide the best possible option in making a certain decision today, or in the future. Two possible options to "continue" or "wait" are modeled in this thesis. Such modeling determines the possible option values of germplasm at different stages of development depending on changes in value and various choices made at different points in time.
Intermarket Trading Strategies and Risk
(North Dakota State University, 2013) Skadberg, Kristopher Douglas
The purpose of this thesis is to research methods that will be used to discover the profitability and risk of spatially arbitraging soybeans. A portfolio is used to analyze trading strategies, and the dependence measures is critical when simulating all of the variables. The dependence measures will aid in selecting the appropriate assets for the portfolio. The profits and risks for each asset will be analyzed and an optimization procedure will weigh the assets appropriately in bushels. Strategizing has become very important for merchandisers, because of the added risk associated with trading commodities. The results indicate that spatial arbitrage profits exist, but each origin does not always have spatial arbitrage opportunities. These trades carry a great deal of risk as a firm becomes more vertically integrated.

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