01 ModelHW1 - 6-1 P = $15; X = $15; t = 0.5; rRF = 0.06; 2...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 6-1 P = $15; X = $15; t = 0.5; rRF = 0.06; 2 = 0.12; d1 = 0.24495; d2 = 0.0000; N(d1) = 0.59675; N(d2) = 0.500000; V = ? Using the Black-Scholes option's value as: V = P[N(d1)] Option Pricing Model, you calculate the Xe -rRF t [N(d2)] = $15(0.59675) - $15e(-0.10)(0.5)(0.50000) = $8.95128 - $15(0.9512)(0.50000) = $1.6729 $1.67. 14-2 a. 0 2 3 4 10% 1 -8 4 4 4 4 NPV = $4.6795 million. b. Wait 2 years: 0 r = 10% 1 | | 10% Prob. 0 0 | 90% Prob. 0 | 0 2 | -9 | -9 3 | 2.2 | 4.2 4 | 2.2 | 4.2 5 | 2.2 | 4.2 6 | 2.2 | 4.2 PV @ Yr. 2 $6.974 $13.313 Low CF scenario: NPV = (-9 + 6.974)/(1.1)2 = -$1.674 High CF scenario: NPV = (-9 + 13.313)/(1.1)2 = $3.564 Expected NPV = .1(-1.674) + .9(3.564) = 3.040 If the cash flows are only $2.2 million, the NPV of the project is negative and, thus, would not be undertaken. The value of the option of waiting two years is evaluated as 0.10($0) + 0.90($3.564) = $3.208 million. Since the NPV of waiting two years is less than going ahead and proceeding with the project today, it makes sense to drill today. 14-7 P = PV of all expected future cash flows if project is delayed. From Problem 14-2 we know that PV @ Year 2 of Low CF Scenario is $6.974 and PV @ Year 2 of High CF Scenario is $13.313. So the PV is: P = [0.1(6.974)+ 0.9(13.313] / 1.102 = $10.479. X = $9. t = 2. rRF = 0.06. 2 = 0.0111. r = 10% d1 = ln[10.479/9] + [0.06 + .5(.0111)](2) = 1.9010 (.0111)0.5 (2)0.5 d2 = 1.9010 - (.0111)0.5 (2)0.5 = 1.7520 From Excel function NORMSDIST, or approximated from the table in Appendix A: N(d1) = 0.9713 N(d2) = 0.9601 Using the Black-Scholes Option Pricing Model, you calculate the option's value as: V = P[N(d1)] - [N(d2)] = $10.479(0.9713) $9e(-0.06)(2)(0.9601) = $10.178 - $7.664 = $2.514 million. Mini Case: 13 - 2 ...
View Full Document

Page1 / 2

01 ModelHW1 - 6-1 P = $15; X = $15; t = 0.5; rRF = 0.06; 2...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online