Consider an oil company that has the opportunity to acquire a five-year licence on a block. When developed, the block is expected to yield 50 million barrels of oil. The current price of a barrel of oil from this field is, say, $10, and the present value of the development cost is $600 million. Moreover, there are two major sources of uncertainty affecting the value of the block: the quantity and the price of the oil. One can make a reasonable estimate of the quantity of the oil by analyzing historical exploration data in geologically similar areas. Similarly, historical data on the variability of oil prices is readily available. These two sources of uncertainty jointly result in a 30 percent standard deviation (s) around the growth rate of the value of operating cash inflows. Holding the option also obliges one to incur the annual fixed costs of keeping the reserve active, let us say, $15 million. We already know that the duration of the option, t, is five years and the risk-free rate, r, is 5 percent. Faced with these data, should the company take up the opportunity