Exotic option-based rural land-use right pricing model

Abstract

New Chinese rural reform and development strategy necessitates an open transfer market for rural land-use right. However, present evaluation approaches fail to reflect the fair market value of rural land-use right, which not only restricts the efficient rural land market development, but also injures the farmers' interests. Therefore, exotic option pricing method is employed into the pricing model of rural land-use right, which is now liberalized into the market as a main factor of production in agricultural sector. The pricing model highlights that the value of rural land-use right consists of income value and capital value, and build the equivalent portfolio to the underlying assets based on the financial engineering principle. The value of underlying assets is decomposed to the portfolio of two securities with existing evaluation: floating rate securities, and American real call option. The model argues that the net present value (NPV) of annual agricultural income on the rural land is uncertain due to the fluctuation of crop prices, and takes into consideration the potential capital gain from the contingent rural land-use right conversion, i.e. from rural land to urban land. The model not only gives new insights of the value composition of Chinese rural land-use right, but also incorporates the residual term of rural land-use right and accrued agricultural investment on the rural land, which can improve the pricing efficiency of the promising rural land market by the analytical expression.