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
Related questions
Question
![[Q: 21-6336383] Extended Binomial Model. A gas company has an opportunity to sell up to 5.5 million gallons of
gasoline in six months at a price of $3.85 per gallon. The price is currently $3.60 per gallon but the price is highly
volatile (o=64%). The nominal risk-free rate is 8%.
The company is evaluating this opportunity using the binomial model, assuming a price change every three
months (n = 4). The company has already determined that the up-state factor is 1.3771, the down-state factor is
0.7261, and the risk-neutral probability of entering the up-state is 45.15%. Calculate the per-gallon value of this
opportunity today by completing this company's analysis. Round the possible six-month gas prices to two decimal
places and use the rounded values in your analysis.
The per-gallon value of this opportunity today is $ 0.5839. (Enter your answer rounded to four decimal places).](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F933b2e7c-bcb1-4a47-8bd3-8f81e6e7ee8a%2F359b0a24-426d-4bf8-a2b6-4b4b12199b38%2Fq23tqji_processed.png&w=3840&q=75)
Transcribed Image Text:[Q: 21-6336383] Extended Binomial Model. A gas company has an opportunity to sell up to 5.5 million gallons of
gasoline in six months at a price of $3.85 per gallon. The price is currently $3.60 per gallon but the price is highly
volatile (o=64%). The nominal risk-free rate is 8%.
The company is evaluating this opportunity using the binomial model, assuming a price change every three
months (n = 4). The company has already determined that the up-state factor is 1.3771, the down-state factor is
0.7261, and the risk-neutral probability of entering the up-state is 45.15%. Calculate the per-gallon value of this
opportunity today by completing this company's analysis. Round the possible six-month gas prices to two decimal
places and use the rounded values in your analysis.
The per-gallon value of this opportunity today is $ 0.5839. (Enter your answer rounded to four decimal places).
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