lattice_value - MIT OpenCourseWare http:/ ESD.71...

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MIT OpenCourseWare ESD.71 / 1.146 / 3.56 / 16.861 Engineering Systems Analysis for Design Fall 2008 For information about citing these materials or our Terms of Use, visit: .
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ESD 71 Assignment Option Valuation by Lattice Assignment Summary: This exercise demonstrates the mechanics of evaluating options through a lattice. Note: This exercise stresses the mechanics of working through the lattice. It does not invoke the concepts of “arbitrage enforced pricing”, or of “risk neutral probabilities” -- these are developed later in the course (and in the sequence of assignments). Learning Objective: to help you develop confidence in the mechanics of evaluating an option using a lattice model of the evolution of a system. Setting: Imagine that you are working with a company that has the opportunity to open a copper mine. Assume that the current price of copper is $2500/ton, and its price will rise, in real terms net of inflation, by 4%/year. Assume that the mine has these characteristics:
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This note was uploaded on 11/08/2011 for the course AERO 16.851 taught by Professor Ldavidmiller during the Fall '03 term at MIT.

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lattice_value - MIT OpenCourseWare http:/ ESD.71...

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