On Real Options in Ethanol: Producers, Blenders, Valuation and Empirics

This paper develops, implements and tests a real option model for the ethanol market. The model makes precise predictions for the price of ethanol as a nonlinear function of the prices of gasoline and corn, for the magnitude of ethanol physical output in terms of the relative pricing of gasoline and corn, and for the value of an ethanol producer as that of a call option on the spread between gasoline and corn. Empirical tests for each of these predictions are supportive of the authors’ model.