Switching Options: The Value of Flexibility Provided by Geographical Diversification

Abstract

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.