Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Consider an offshore oil property with an estimated oil reserve of 50 million barrels of oil, where the present value of the development cost is

image text in transcribed
Consider an offshore oil property with an estimated oil reserve of 50 million barrels of oil, where the present value of the development cost is $55 per barrel and the development lag is two years. The firm has the rights to exploit this reserve for the next 20 years, and the marginal value per barrel of oil is $45 per barrel currently (price per barrel - marginal cost per barrel). Once developed, the net production revenue each year will be 5% of the value of the reserves. The riskless rate is 2%, and the variance is 0.03 Given this information, calculate the value of the oil reserve using the Black-Scholes pricing method. Consider an offshore oil property with an estimated oil reserve of 50 million barrels of oil, where the present value of the development cost is $55 per barrel and the development lag is two years. The firm has the rights to exploit this reserve for the next 20 years, and the marginal value per barrel of oil is $45 per barrel currently (price per barrel - marginal cost per barrel). Once developed, the net production revenue each year will be 5% of the value of the reserves. The riskless rate is 2%, and the variance is 0.03 Given this information, calculate the value of the oil reserve using the Black-Scholes pricing method

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

International Financial Management

Authors: Jeff Madura

7th Edition

0324071744, 978-0324071740

More Books

Students also viewed these Finance questions

Question

Find the Q value for 11H + 21H ( 32He + y..

Answered: 1 week ago