1.Question 1.

a)Create a spreadsheet modeling the Black-Scholes value of the real option that Laura Martin calculated. Use the inputs from Exhibit 10 in the case to produce your spreadsheet. Make sure that you label all important aspects of your model and show every intermediate step/calculation. Cary no less than 5 significant digits for every calculation in this problem as well as throughout the assignment.

b) Create a 10-step binomial model to model the same option given in part a. Your price in this section should be close (not exact) to that in part a. As a hint, create an asset tree first and then below that create a parallel (but backward calculating) option tree.

Exhibit 10 Black-Scholes Valuation for Stealth Tier PV of Potential Project/Home Passed (S) Investment Cost (X) Time to Maturity (T, years) Risk Free Rate (r)- Volatility (o) Call Option Value/Home Passed Times: Number of empty 6 MHz channels on the Stealth Tier Asset Value of the Stealth Tier Less: current investment/home passed Value of the Stealth Tier/home passed Current Market valuation/home passed Stealth Tier/current valuation $23.15 $1.22 10 5.25% 50% $22.45 17 $381.65 $40.00 $341.65 $2,500 14% Exhibit 10 Black-Scholes Valuation for Stealth Tier PV of Potential Project/Home Passed (S) Investment Cost (X) Time to Maturity (T, years) Risk Free Rate (r)- Volatility (o) Call Option Value/Home Passed Times: Number of empty 6 MHz channels on the Stealth Tier Asset Value of the Stealth Tier Less: current investment/home passed Value of the Stealth Tier/home passed Current Market valuation/home passed Stealth Tier/current valuation $23.15 $1.22 10 5.25% 50% $22.45 17 $381.65 $40.00 $341.65 $2,500 14%