Ex-ante valuation of United States agricultural support programs: An application of option pricing theory and methods

Given the size and variability of U.S. federal outlays on agricultural support programs, alternative means of structuring and implementing the programs are frequently considered, particularly through private sector risk management institutions such as futures and option markets. The Option Pilot Project (OPP) is one such alternative. Even though the similarity between government support programs and options has been addressed conceptually by many researchers, quantitative estimates of contingent values of agricultural programs have often been based on the direct application of existing option valuation models. There are several "exotic" option-like features embedded in the U.S. agricultural support programs, and thus the existing option pricing models have to be substantially modified to provide ex-ante valuation estimates of the programs.