11-4sol - optimal to wait. Year 2 and Year 3 have similar...

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Given Risk-neutral probability 0.46 Risk free Interest rate 5% Discount factor = exp(Risk free interest rate) 0.95 Strike (in $ millions) $23.00 Solution Today Text Color Legend Value of Beginning Oil Field Operations Now $25.000 NPV of waiting (NPV-Waiting) $2.6352 NPV of Exercising Now (NPV-Now) $2.0000 Value of American Option = max (NPV-Waiting,NPV-Now) $2.6352 Cell Outline Legend Stock Wait Exercise = Value given in = Formula/Calc = Qualitative an = Goal Seek or = Crystal Ball In = Crystal Ball O PROBLEM 11-4: Valuation an Am a. The lease is worth $2.6352 milllion today. b. The exercise/wait policy is indicated by the yellow/green highlighted cell on each node of the tree. At ye
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Unformatted text preview: optimal to wait. Year 2 and Year 3 have similar exercise/wait choices. Year One Year Two Year Three $35.8300 $- $12.8300 $31.7800 $12.8300 $7.4604 $8.7800 $28.1900 $8.7800 $26.5500 $4.6621 $- $5.1900 $3.5500 $5.1900 $23.5500 $3.5500 $1.5621 $0.5500 $20.8800 $1.5621 $19.6600 $0.6874 $- $(2.1200) $(3.3400) $0.6874 $17.4400 $- $- $(5.5600) $- $14.5700 $- $(8.4300) $- Solution Legend in problem culation/Analysis required nalysis or Short answer required r Solver cell Input Output merican Option year one, on the upper branch it is optimal to exercise, on the lower branch it is...
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This note was uploaded on 07/24/2009 for the course FIN FIN taught by Professor Robbani during the Summer '09 term at University of Maryland Baltimore.

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11-4sol - optimal to wait. Year 2 and Year 3 have similar...

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