Gasworks, Incorporated, has been approached to sell up to 3.6 million gallons of gasoline in three months at a price of $2.95 per gallon. Gasoline is currently selling on the wholesale market at $2.80 per gallon and has a standard deviation of 58 percent. If the risk-free rate is 3 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.) Answer is complete but not entirely correct. Value of contract $ 1,235,409.64

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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Bhupatbhai 

Gasworks, Incorporated, has been approached to sell up to 3.6 million gallons of
gasoline in three months at a price of $2.95 per gallon. Gasoline is currently selling on
the wholesale market at $2.80 per gallon and has a standard deviation of 58 percent. If
the risk-free rate is 3 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.)
Answer is complete but not entirely correct.
Value of contract
$
1,235,409.64
Transcribed Image Text:Gasworks, Incorporated, has been approached to sell up to 3.6 million gallons of gasoline in three months at a price of $2.95 per gallon. Gasoline is currently selling on the wholesale market at $2.80 per gallon and has a standard deviation of 58 percent. If the risk-free rate is 3 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.) Answer is complete but not entirely correct. Value of contract $ 1,235,409.64
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