A Monte Carlo Methodology for Solving the Optimal Timber Harvest Problem with Stochastic Timber and Carbon Prices

This article presents a Monte Carlo methodology for solving the stochastic optimal timber harvest problem modeled as a recurrent American call option. A detailed description of the proposed method- ology is given, and the Monte Carlo technique is contrasted with finite difference methods typically used to find solutions of the optimal har- vest problem with stochastic prices. The use of the methodology is then demonstrated via an example. In the example, expected bare land values and optimal harvest policies are calculated for a Douglas- fir stand in western Washington State. It is assumed that the forest owner derives revenue from traditional timber sales and carbon seques- tration, and that prices of timber and carbon follow a known stochastic process. Results of the calculations are discussed.  MCFNS 2(2):67-77.