# 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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