Arbitrage-free valuation of a federal timber lease

The objective of this paper is to describe a quantitative framework for off ering timber harvest bids on federal lands which includes special considera tions of the volatility of timber indices and the harvesting costs involved in harvesting timber. The advantage of such an approach is that it provide s a precise framework in which various underlying considerations, such as v olatility and cost, may be systematically defined, measured, and evaluated. The valuations derived in this paper provide a market standard against whi ch additional value that encompasses social or environmental welfare may be evaluated. We discuss a specific USDA Forest Service timber sale as a case study to illustrate this approach.