Corporate Finance
Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Chapter 23, Problem 4CQ

Real Options Utility companies often face a decision to build new plants that burn coal, oil, or both. If the prices of both coal and gas are highly volatile, how valuable is the decision to build a plant that can bum either coal or oil? What happens to the value of this option as the correlation between coal and oil prices increases?

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Assume a volatility of 25%. What is going to be the hedging ratio for a replicating portfolio for an option that pays $0$ in the case of good state of the world and $2$ in the BAD state of the world. Assume the option expires in half a year and the current stock price is 20$ ( Hint: form the replicating portfolio and calc the alpha for this payoff )  p.s. Don't chase bps !!   -0.28   -0.14   -0.89   NONE OF THE ABOVE
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