Week 8 Tutorial Solutions

Week 8 Tutorial Solutions - Solutions Tutorial Week 8...

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Solutions – Tutorial Week 8 Chapter 23 9. a. A five-year American call option on oil. The initial exercise price is C$70 a barrel, but the exercise price rises by 5% per year. b. An American put option to abandon the restaurant at an exercise price of $5 million. The restaurant’s current value is ($700,000/r). The annual standard deviation of the changes in the value of the restaurant as a going concern is 15%. c. A put option, as in (b), except that the exercise price should be interpreted as $5 million in real estate value plus the present value of the future fixed costs avoided by closing down the restaurant. Thus, the exercise price is: $5,000,000 + ($300,000/0.10) = $8,000,000. Note: The underlying asset is now PV(revenue – variable cost), with annual standard deviation of 10.5%. d. A complex option that allows the company to abandon temporarily (an American put) and (if the put is exercised) to subsequently restart (an American call). e.
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This note was uploaded on 08/22/2011 for the course FINC 2011 taught by Professor Craigmellare during the Three '10 term at University of Sydney.

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Week 8 Tutorial Solutions - Solutions Tutorial Week 8...

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