Gasworks, Incorporated, has been approached to sell up to 2.6 million gallons ofgasoline in three months at a price of $2.55 per gallon. Gasoline is currently selling onthe wholesale market at $2.30 per gallon and has a standard deviation of 60 percent.If the risk-free rate is 6 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 andenter your answer in dollars, not millions of dollars, rounded to 2 decimal places,e.g., 1,234,567.89.)Value of contract

A two-state model refers to the method of calculating the price of the option where the final value…

Answered: Gasworks, Incorporated, has been…

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

Section: Chapter Questions

Problem 1PS

See similar textbooks

Similar questions

Consider a two year put options with strike Price sh. 52 on a stick whose current price is sh.50. suppose there is 2 times steps and each step is one year and in each times steps the price move up or down by 20%. Suppose the risk Free rate is 5% . Calculate value of put assuming; A) Europeans options B) American options
YOU ARE A FINANCIAL ANALYST FOR A COMPANY THAT IS CONSIDERING A NEW PROJECT. IF THE PROJECT IS ACCEPTED, IT WILL USE A FRACTION OF A STORAGE FACILITY THAT THE COMPANY ALREADY OWNS BUT CURRENTLY DOES NOT USE. THE PROJECT IS EXPECTED TO LAST 10 YEARS, AND THE ANNUAL DISCOUNT RATE IS 10% (COMPOUNDED ANNUALLY). YOU RESEARCH THE POSSIBILITIES, AND FIND THAT THE ENTIRE STORAGE FACILITY CAN BE SOLD FOR €100,000 AND A SMALLER (BUT BIG ENOUGH) FACILITY CAN BE ACQUIRED FOR €40,000. THE BOOK VALUE OF THE EXISTING FACILITY IS €60,000, AND BOTH THE EXISITING AND THE NEW FACILITIES (IF IT IS ACQUIRED) WOULD BE DEPRECIATED STRAIGHT LINE OVER 10 YEARS (DOWN TO A ZERO BOOK VALUE). THE CORPORATE TAX RATE IS 40%. DISCUSS WHAT IS THE OPPORTUNITY COST OF USING THE EXISTING STORAGE CAPACITY?
. Consider the problem of investing in a risky project. A project costs $500. The annual cash flow for the first year are $60 and grows at the rate of 3% annually. The risk free rate is 5%. The company WACC is 12%. . Suppose the project has an option to let you wait and decide whether to accept the project. You can invest now or next year or in two years. At the end of 2 years you either invest in the project or lose it since further deferral is not possible. The project analyst has done the calculations and has produced the binomial tree showing the cash flows from the project at future dates. Calculate the NPV of the project. p_up 0.40 $80 $70 $60 $60 $50 $40 ○ $783.21 ○ $563.45 ○ $166.67 ○ $666.67
On the London Metals Exchange, the price for copper to be delivered in one year is $5,500 a ton. (Note: Payment is made when the copper is delivered.) The risk-free interest rate is 2% and the expected market return is 8%. a. Suppose that you expect to produce and sell 10,000 tons of copper next year. What is the PV of this output? Assume that the sale occurs at the end of the year. Note: Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. b-1. If copper has a beta of 1.2, what is the expected price of copper at the end of the year? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. b-2. Assume copper has a beta of 1.2. What is the certainty-equivalent end-of-year price? X Answer is complete but not entirely correct. 53.92 million per ton a. Present value b-1. Expected price b-2. Certainty-equivalent price $ $ IS 6,383.38 5,937 per ton
Suppose that your company is planning to sell 1.25 million litres of fuel in two years. Thecurrent price of fuel is £1.60 per litre. a) Suppose there is a two-year heating oil futures contract available. The futuresprice is £1.63 per litre. How many contracts would you need to fully eliminate yourrisk exposure over the next two years? How many contracts would you need ifyour optimal hedging ratio was 0.75? What position in these contracts would youtake today? Explain. b) Evaluate the outcomes of your hedging strategy if the price of fuel in two years is(1) £1.72 per litre, and (2) £1.58 per litre. In each case assume the heating oilfutures price to be equal to that of the fuel. Comment on your results.
A company that manufactures clear PVC pipe is investigating two production options with the following cash flow estimates. The chief operating officer (COO) has asked you to determine if the batch option would ever have a lower annual worth than the continuous flow system using interest rates over a range of 5% to 15% for the batch option, but only 15% for the continuousflow system. The batch process can be used anywhere from 3 to 10 years. (Note: The continuous flow process was previously determined to have its lowest cost over a 5-year life cycle.)
a. Use the Black-Scholes formula to find the value of the following call option. (Do not round intermediate calculations. Round your final answer to 2 decimal places.) i. Time to expiration 1 year. ii. Standard deviation 40% per year. iii. Exercise price $84. iv. Stock price $84. v. Interest rate 4% (effective annual yield). b. Now recalculate the value of this call option, but use the following parameter values. Each change should be considered independently. (Do not round intermediate calculations. Round your final answers to 2 decimal places.) i. Time to expiration 2 years. ii. Standard deviation 50% per year. iii. Exercise price $94. iv. Stock price $94. v. Interest rate 6%. c. In which case did increasing the value of the input not increase your calculation of option value? a. Call option value b-i. Call option value when time to expiration is 2 years. b-ii. Call option value when standard deviation is 50% per year. b-iii. Call option value when exercise price is $60. b-iv. b-v. C…
Ivy's Ice Cream is looking at an opportunity that would require an investment of $900,000 today. The investment will provide cash flows of $250,000 in the first year, $400,000 in the second year, and $600,000 in the third year. If the interest rate is 8%, what is the NPV of this investment opportunity? Should Ivy's Ice Cream move forward with this investment based on the NPV? (Round your answer to the nearest whole dollar.)
On May 25, 2018 you purchased an option which will allow you to sell a commercial building on August 14, 2022 for $42 million. Your current estimate of the value of the commercial building is $38 million. The annual volatility for the change in the commercial building’s value is 57% and the risk-free rate is 6%. What type of option is this? Calculate the value of the option to sell the commercial building. Please show work in excel and equations/questions used.
Suppose the call option of Tesla company has an exercise price of $200 and expires in 90 days. Assume the current price of Tesla stock is $240, with a standard deviation of 40% per year. The risk-free interest rate is 6.18% per year. First, using the Black-Scholes formula, compute the price of the call. And then use put-call parity to compute the price of the put with the same strike and expiration date. Based on put-call parity, what should be the put option price? $ 2.65 $ 1.78 $ 3.69 $ 4.22 None of the above
4
The price of a European CALL option is $8.00 and a European PUT is $10.00. The expiration date is 1 year and has an exercise price k=$60.00, the share price of the underlying asset is quoted today at $60.00. The risk-free rate is 10% per year. Propose a strategy that generates arbitrage and a profit.

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS