1. Describe each of the following situations in the language of options. (a) Drilling rights to undeveloped heavy crude oil in Norther Alberta. Development and production of the oil is a negative-NPV endeavor. (Assume a break-even oil price is C $90 per barrel, versus a spot price of C$80.) However, the decision to develop can be put off for up to five years. Development costs are expected to increase by 5% per year. (b) A restaurant is producing net cash flows, after all out-of-pocket expenses, of $700,000 per year. There is no upward or downward trend in the cash flows, but they fluctuate as a random walk, with an annual standard deviation of 15%. The real estate occupied by the restaurant is owned, not leased, and could be sold for $5 million. Ignore taxes. 2. You own a one-year option to buy one acre of San Diego real estate. The exercise price is $2 million, and the current, appraised market value of the land is $1.7 million. The land is currently used as a parking lot, generating just enough money to cover real estate taxes. The annual standard deviation is 15% and the interest rate 12%. How much is your option worth? Use the Black-Scholes-Merton formula