Bhupatbhai Gasworks, Incorporated, has been approached to sell up to 3.6 million gallons ofgasoline in three months at a price of $2.95 per gallon. Gasoline is currently selling onthe wholesale market at $2.80 per gallon and has a standard deviation of 58 percent. Ifthe risk-free rate is 3 percent per year, what is the value of this option? Use the two-statemodel to value the real option. (Do not round intermediate calculations and enter youranswer in dollars, not millions of dollars, rounded to 2 decimal places, e.g.,1,234,567.89.)Answer is complete but not entirely correct.Value of contract$1,235,409.64

Step 1: To value the real option using the two-state model, we need to calculate the expected value…

Answered: Gasworks, Incorporated, has been…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter14: Real Options

Section: Chapter Questions

Problem 4MC

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