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Identifying Optimal Storage Period of Onion Using Real Option Value

This paper determines a real option value from waiting to sell onion where storage company’s profit is optimal. To determine a real option value, first, a variance ratio test is conducted to test for the existence of mean reversion in onion prices. The results show that price of onion has mean reversion under the 5% significance level. Second, onion’s price process model including mean reversion is estimated. The result shows that mean reversion occurs at a rate of 3.639% weekly. Finally, the cutoff price is determined using estimated price process and a universal lattice model. The optimal cutoff price is 19,600 won in the 2nd week of August. It is about 3,000 won higher than sample mean price which is 16,512 won. The result indicates that storage companies can receive a higher price when they are waiting to sell onion by 2nd week of August than selling at harvest.