Document attached - in the pasted text below, I know the bolded answers are correct. Just need to see these worked out, as I know I'm close on a few but just unsure of my work. Many thanks.

Which of the following are examples of real options

Investment timing options

Abandonment option

Expansion/Growth option

Flexibility option

Only a, b, d

Only a, c, d

All of the above

A put option gives its owner the _____ to _____ a stock at a predetermined strike price.

right/buy

right/sell

obligation/buy

obligation/sell

Use the quote given below to answer question 3-5.

The quotes are based on November 9, 2015 prices. The quotes shows market information for options on S&P500 index that expire on Dec 31, 2015. Assume that you can buy at the ask and sell at the bid.

What is the cost of buying a straddle (one contract of a call and one contract of put) with a strike price of 2085?

$ 4170

$ 8640

$ 8750

$ 9010

What is the percentage return if you bought the straddle outlined in question (3) and at the expiration of the option the index level was 2050. Assume that there is no transactions costs at expiration to unwind (sell) your positions.

-100%

-57%

+55%

+72%

What is the approximate change in the value of a put option with strike price of 2080 when the index level increases by 1 point?

+$ 46.33

+$ 48.04

- $ 46.33

-$ 51.95

Use Information below for questions 6-7

Hotel Holding Co. (HHC) is considering building a hotel in a Caribbean island. HHC estimates the property and construction costs at $100 million dollars today and they expect the property generates expected annual total after-tax cash flows of $11 million dollars in perpetuity with the first payment coming at the end of year two.

Local government currently is reviewing its hospitality tax and corporate tax regulations to encourage foreign investment and tourism. Views are divided inside the government, but it is expected to have the final ruling by the end of year. Investment advisers estimate a 50% chance of favorable laws which results in after tax cash flows of $12 million dollars and a 50% chance of unfavorable laws yielding cash after tax flows of $10 million dollars a year (same expected value of 11 million$ and the first cash flow again coming in two years from today)

A discount rate of 10% is suggested for the project and risk free rate is 5%.

Note: under these assumptions project cash flows will be the same regardless of investing project at time zero or time 1 (this is similar to a non-dividend paying stock as discussed in Chapter 22.2)

HHC has the option to hold this investment for one year until regulations are finalized. The project will cost $110 million (100*1.1) and same cash flows will be generated at the same time (in two years from now). How much is this option worth to HHC?

$4.54 million

$7.14 million

$2.38 million

$4.76 million

HHC also has the option to start the project today and sell the project for 110 million dollars in one year if the regulations are unfavorable. What is the value of this option? (Hint: This is a put option)

$4.54 million

$7.14 million

$2.38 million

$4.76 million

KoBalt Mining has recently acquired the technology to extract a rare earth element (REE) more efficiently. The company has the opportunity to invest in a REE mine in china which has a present value of $240 m dollars and requires an investment of $200 m. Due to recent public and political backlash in china regarding exploitation of REEs, the company has the option to wait one year until the turmoil is resolved and Chinese government finalize its position on REEs extraction. The investment?s annual cash flows will either be $28m or $18m depending on the ruling.

After one year, the investment will still require $200m, but the firm will not realize the end of year one cash flows. What is the value of the option to wait? Should the company wait?

Assume a discount rate of 10% and a risk free rate of 5%.

Note: this is similar to the example in Chapter 22 section 2 (Malted Herring Option) where waiting will cause the loss of 1 year worth of cash flows

40 / Yes

40 / No

37.40 / Yes

37.40 / No

GatorTech stock is currently $50. Using Black-Scholes formula, what is the value of a call option on GatorTech stock that expires 1 year from now and has a strike price of $65. The risk free rate is 5% and GatorTech?s expected stock return is 10%. GatorTech?s stock monthly return volatility is 10%

$0.03

$0.12

$3.15

$3.87

• Assume that you are interested in acquiring the exclusive rights to market a new product. If you do acquire the rights to the product, you estimate that it will cost you $250 million upfront to set up infrastructure needed to provide the service. Based upon your current projections, you believe that the service will generate $75 million in after-tax cash flows each year. In addition, you expect to operate without serious competition for the next 10 years. Assuming a discount rate of 10%, a riskless rate of 4% and a standard deviation of 30% of the project cash flows, find the value of the exclusive rights to this project. ( see Valuing a Patent: The case of Avonex, Damodaran Article)
  • $62.46 million.
  • $30.60 million
  • $7.88 million.
  • None of the above

IMBA -FIN 6425 - Corporate Finance - Nimalendran Quiz: Real Options This is an individual quiz and you should submit the answers on-line by the scheduled date. You are allowed to use any resources EXCEPT help from any other person. You are allowed to use EXCEL for the calculations. There are 10 questions. 1) Which of the following are examples of real options a. Investment timing options b. Abandonment option c. Expansion/Growth option d. Flexibility option e. Only a, b, d f. Only a, c, d g. All of the above 2) A put option gives its owner the _____ to _____ a stock at a predetermined strike price. a. right/buy b. right/sell c. obligation/buy d. obligation/sell IMBA - FIN 6425 -Nimalendran Page 1/4 Use the quote given below to answer question 3-5. The quotes are based on November 9, 2015 prices. The quotes shows market information for options on S&P500 index that expire on Dec 31, 2015. Assume that you can buy at the ask and sell at the bid. 3) What is the cost of buying a straddle (one contract of a call and one contract of put) with a strike price of 2085? a) $ 4170 b) $ 8640 c) $ 8750 d) $ 9010 4) What is the percentage return if you bought the straddle outlined in question (3) and at the expiration of the option the index level was 2050. Assume that there is no transactions costs at expiration to unwind (sell) your positions. a) b) c) d) -100% -57% +55% +72% 5) What is the approximate change in the value of a put option with strike price of 2080 when the index level increases by 1 point? a. +$ 46.33 b. +$ 48.04 c. - $ 46.33 d. -$ 51.95 IMBA - FIN 6425 -Nimalendran Page 2/4 Use Information below for questions 6-7 Hotel Holding Co. (HHC) is considering building a hotel in a Caribbean island. HHC estimates the property and construction costs at $100 million dollars today and they expect the property generates expected annual total after-tax cash flows of $11 million dollars in perpetuity with the first payment coming at the end of year two. Local government currently is reviewing its hospitality tax and corporate tax regulations to encourage foreign investment and tourism. Views are divided inside the government, but it is expected to have the final ruling by the end of year. Investment advisers estimate a 50% chance of favorable laws which results in after tax cash flows of $12 million dollars and a 50% chance of unfavorable laws yielding cash after tax flows of $10 million dollars a year (same expected value of 11 million$ and the first cash flow again coming in two years from today) A discount rate of 10% is suggested for the project and risk free rate is 5%. Note: under these assumptions project cash flows will be the same regardless of investing project at time zero or time 1 (this is similar to a non-dividend paying stock as discussed in Chapter 22.2) 6) HHC has the option to hold this investment for one year until regulations are finalized. The project will cost $110 million (100*1.1) and same cash flows will be generated at the same time (in two years from now). How much is this option worth to HHC? a. $4.54 million b. $7.14 million c. $2.38 million d. $4.76 million 7) HHC also has the option to start the project today and sell the project for 110 million dollars in one year if the regulations are unfavorable. What is the value of this option? (Hint: This is a put option) a. $4.54 million b. $7.14 million c. $2.38 million d. $4.76 million 8) KoBalt Mining has recently acquired the technology to extract a rare earth element (REE) more efficiently. The company has the opportunity to invest in a REE mine in china which has a present value of $240 m dollars and requires an investment of $200 m. Due to recent public and political backlash in china regarding exploitation of REEs, the company has the option to wait one year until the turmoil is resolved and Chinese government finalize its position on REEs extraction. The investment's annual cash flows will either be $28m or $18m depending on the ruling. After one year, the investment will still require $200m, but the firm will not realize the end of year one cash flows. What is the value of the option to wait? Should the company wait? Assume a discount rate of 10% and a risk free rate of 5%. Note: this is similar to the example in Chapter 22 section 2 (Malted Herring Option) where waiting will cause the loss of 1 year worth of cash flows a. b. c. d. 40 / Yes 40 / No 37.40 / Yes 37.40 / No IMBA - FIN 6425 -Nimalendran Page 3/4 9) GatorTech stock is currently $50. Using Black-Scholes formula, what is the value of a call option on GatorTech stock that expires 1 year from now and has a strike price of $65. The risk free rate is 5% and GatorTech's expected stock return is 10%. GatorTech's stock monthly return volatility is 10% a. $0.03 b. $0.12 c. $3.15 d. $3.87 10)Assume that you are interested in acquiring the exclusive rights to market a new product. If you do acquire the rights to the product, you estimate that it will cost you $250 million upfront to set up infrastructure needed to provide the service. Based upon your current projections, you believe that the service will generate $75 million in after-tax cash flows each year. In addition, you expect to operate without serious competition for the next 10 years. Assuming a discount rate of 10%, a riskless rate of 4% and a standard deviation of 30% of the project cash flows, find the value of the exclusive rights to this project. ( see Valuing a Patent: The case of Avonex, Damodaran Article) Note that the B-S model with dividend yield of q is given by C=S0e-qTN(d1)-Xe-rTN(d2) , and d1=[ln(S0/X)+(r-q+2/2)T]/[ *Sqrt(T)]. a. b. c. d. $62.46 million. $30.60 million $7.88 million. None of the above IMBA - FIN 6425 -Nimalendran Page 4/4