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Option value embedded on the Brazilian flex fuel vehicles

Brazilian auto industry has changed significantly since 2003 by the introduction of the flexible fuel vehicles that can run with any mix of gasoline or sugarcane ethanol. Sugarcane ethanol is a well known renewable fuel and an efficient alternative to fossil fuel due to its high energy yield and also to its great potential for fixing carbon dioxide. Consumers see great opportunity in acquiring a flex fuel vehicle because the car owners have the option of selecting the fuel regarding primarily their relative prices. What are the benefits for Brazilian consumers of owning a flex fuel vehicle in comparison with gasoline engine cars? This study applies the real options methodology to capture the worth of owning and operating a Brazilian flex fuel vehicle as regards the relative prices of the two fuels. The more uncertain the relative prices of fuels the more valuable will be the option value embedded in Brazilian flex fuel vehicles. Sensitivity analyses regarding different scenarios on Brazilian fuel markets are developed and their impacts are discussed.