Gasworks, Inc., has been approached to sell up to 2.8 million gallons of gasoline in three months at a price of $2.70 per gallon. Gasoline is currently selling on the wholesale market at $2.40 per gallon and has a standard deviation of 62 percent. If the risk-free rate is 7 percent per year, what is the value of this option? Use the two- state model to value the real option. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) Value of contract

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Gasworks, Inc., has been approached to sell up to 2.8 million gallons of gasoline in three
months at a price of $2.70 per gallon. Gasoline is currently selling on the wholesale
market at $2.40 per gallon and has a standard deviation of 62 percent.
If the risk-free rate is 7 percent per year, what is the value of this option? Use the two-
state model to value the real option. (Do not round intermediate calculations and enter
your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g.,
1,234,567.89.)
Value of contract
Transcribed Image Text:Gasworks, Inc., has been approached to sell up to 2.8 million gallons of gasoline in three months at a price of $2.70 per gallon. Gasoline is currently selling on the wholesale market at $2.40 per gallon and has a standard deviation of 62 percent. If the risk-free rate is 7 percent per year, what is the value of this option? Use the two- state model to value the real option. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) Value of contract
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