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…

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

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Gasworks, Incorporated, has been approached to sell up to 4.2 million gallons of gasoline in three months at a price of $3.30 per gallon. Gasoline is currently selling on the wholesale market at $3.10 per gallon and has a standard deviation of 58 percent. If the risk-free rate is 4 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.)
Gasworks, Incorporated, has been approached to sell up to 2.6 million gallons of gasoline in three months at a price of $2.55 per gallon. Gasoline is currently selling on the 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 and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) Value of contract
4
Suppose the price of gasoline per gallon is currently $5. The risk manager of Universe Airlines expects the price per gallon next year to be either $7 or $4 with equal probabilities. The company plans to buy 1 million gallons of gasoline in one year. The risk manager is concerned about future rising cost of gasoline and is considering using either futures or calls to hedge against the risk. Suppose the riskfree interest rate is 10% per annum. What is the futures price of gasoline per gallon for delivery in one year? What are the possible payoffs of the futures one year from now? If calls are used, only the ones with the same exercise price as the futures price are available now. How much would it cost to buy the calls? What are the possible profits of the calls (the payoffs net of the call premium) one year from now? Suppose the investors of the company are risk averse and their collective risk attitude can be described by log utility. Assume that the risk manager maximizes the…
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.
You have the chance to purchase an oil well. Your best estimate is that the oil well’s net royaltyincome will average $25,000 per year for five years. There will be no residual value at that time.Assume that the cash inflow occurs at each year-end and that considering the uncertainty in yourestimates, you expect to earn 5 percent per year on the investment. What should you be willing topay for this investment right now (round to the nearest dollar)?
You own a one-year European call option to buy one acre of Los Angeles real estate. The exercise price is $2.03 million. Suppose the land is occupied by a warehouse generating rents of $165,000 after real estate taxes and all other out-of-pocket costs. The present value of the land plus the warehouse is $1.73 million. The annual standard deviation is 18% and the interest rate is 11%.How much is your call worth? (Enter your answer in dollars not in millions. Do not round intermediate calculations.)
The price of Bobco stock is currently $60. In one year, the price will either be s66 or $54. If the one-year risk free rate of interest is 6%, what is the price of a Bobco call option with an exercise price of $61? Recall, you will want to set 66N - 1.06B = 5 as one of the equations you need to solve this problem. You will need to figure out the other equation, then use both equations to solve for N and B. Then, you will price the portfolio of N shares less the amount borrowed. Round your answer to nearest cent. $6 $60 $54
Please show calculations and stepwise, dont copy pls. Investment options A and B are equally risky and have identical initial costs. Each investment will produce cash inflows of $20,000. Option A will pay five annual payments, starting in 1 year, of $4,000 each. Option B will pay $8,000 the first year followed by four annual payments of $3,000 each. Which one of the following statements is correct given these two investment options? Assume a positive rate of return. A) Neither investment should be undertaken. B) Option A is the better investment. C) Option B has a higher net present value. D) Option B has a lower future value at Year 5. E) Both options are of equal value..
USE THE PV FUNCTION IN EXCEL !!!! You can buy a car that is advertised for $20,520 on the following terms: (a) pay $20,520 and receive a $5,520 rebate from the manufacturer; (b) pay $570 a month for 3 years for total payments of $20,520, implying zero percent financing. Calculate the present value of the payments for option (a) if the interest rate is 1.25% per month. Calculate the present value of the payments for option (b) if the interest rate is 1.25% per month. Note: Do not round intermediate calculations. Round your answer to 2 decimal places. Which is the better deal?
Suppose a Japanese company, Matsushita, has to sell Can$ 50 m sometime during the next 6 months, and would like to lock in a minimum ¥ value. The price of a put option with a strike price of K = ¥ 230/$ is ¥ 4/$ What is the actual amount that they receive if the spot rate at the end of 3 months is ¥ 245/$?Since ST >K, the options are worthless and Matsushita can do better by selling at the market rate of ¥ 245/$, rather than the exercise price of ¥ 230/$. Thus, their total receipts will be O¥4/$ O¥ 234 / $ O¥241/$ O¥ 230 / $
Mega Company believes the price of oil will increase in the coming months. Therefore, it decides to purchase call options on oil as a price-risk-hedging device to hedge the expected increase in prices on an anticipated purchase of oil.On November 30, 20X1, Mega purchases call options for 14,000 barrels of oil at $30 per barrel at a premium of $2 per barrel with a March 1, 20X2, call date. The following is the pricing information for the term of the call: Date Spot Price Futures Price (for March 1, 20X2, delivery) November 30, 20X1 $ 30 $ 31 December 31, 20X1 31 32 March 1, 20X2 33 The information for the change in the fair value of the options follows: Date Time Value Intrinsic Value Total Value November 30, 20X1 $ 28,000 $ –0– $ 28,000 December 31, 20X1 6,000 14,000 20,000 March 1, 20X2 42,000 42,000 On March 1, 20X2, Mega sells the options at their value on that date and acquires 14,000 barrels of oil at the spot price. On June 1, 20X2, Mega sells the…

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