TITLE:
Optimal Water Allocation Model of Inter-Basin Water Transfer Based on Option Contracts under Uncertainty
AUTHORS:
Zhichao Gao, Minghu Ha, Hong Zhang, Linqing Gao
KEYWORDS:
Inter-Basin Water Transfer, Inexact Optimisation, Water Call Option, Water Allocation
JOURNAL NAME:
Journal of Mathematical Finance,
Vol.13 No.2,
May
30,
2023
ABSTRACT: Inter-basin water transfer is a large-scale artificial method to transfer water from water-surplus areas to water-deficient areas, so as to promote the economic development of water-deficient areas. In this paper, water call options are introduced to improve the management of inter-basin water transfer. As the seller of water call options, the water diversion area benefits from water call options, as well as bears the risk of a water shortage caused by the exercises of water call options. On the one hand, the economic benefit of the system can be maximized by choosing the maximum water availability and the exercise prices of water call options. On the other hand, by using water call options, the water diversion area obtains certain economic compensation and the water receiving area gains additional water to ensure water security in dry seasons. By considering the uncertainties in the process of water resource management, an interval two-stage stochastic multi-objective mixed integer programming (ITSMMIP) model is developed for supporting decisions of water resource allocation when water call options are applied in inter-basin water transfer. The results prove the effectiveness of the model.