WANTED: NO ARBITRAGE, DEAD OR ALIVE: A COMPARISON OF HEDGING WITH FUTURES CONTRACTS OR RESOURCE RESERVES FOR ARBITRAGE-FREE RESOURCE HARVEST CONTRACT VALUATION
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We develop a valuation model based on conservation rules, and stochastic prices and inventories. Dynamic programming determines the optimal harvest amount. A hedge portfolio based on a resource reserve is proposed. The optimal size of the reserve is determined, as well as its value.