A developer has just acquired 60 acres of property in Ngorongoro to develop a safari wildlife centre. The safari centre will also include a hotel development. In order to generate operating capital, the developer is selling rights. The rights give the holder of the contract the right to purchase a lodge in the hotel development for a fixed price. Each lodge is half an acre. The agreements expire 6 months after they are signed.
The developer is offering the following inducement. A potential lodge owner can purchase the lodge for TSh25million at the end of 6 months if the lodge owner enters into the contract this week. The purchase price for a lodge increases to TSh40million on all contracts signed after this week.
1 Describe and explain the type of option being sold by the developer. (15 marks)
2 Describe and explain the position held by the potential lodge owner as an option. (15 marks)
3 Discuss the risks associated with this transaction to both the developer and the lodge owner. (15 marks)
4 Suppose we purchased a right on one of the lodges during the inducement period, and it has just been discovered that a very rare type of lion has been discovered close to the lodge. Explain what you think will happen to the value of the right that you own. Is this contract in the money? Explain. (15 marks)
5 Suppose that the developer was selling two contracts. One contract permits you to purchase a lodge any time during the 6-month period, and the other allows you to purchase the lodge only at the end of 6 months. Which of the two contracts is worth more? Explain.
(15 marks)
6 To reduce your cash outflows shortly before it became public knowledge that the rare lions live near the lodge, you sign a contract with a colleague. This contract gives you the right to sell the lodge at any time in the next 6 months to your friend for TSh35million.
Describe your position and that of your friend. (15 marks)
7 Describe the potential obligations associated with the options involving the developer and the two friends. Use diagrams to illustrate your answer. (10 marks)