Question
For all questions, use risk-neutral pricing (when needed) and assume that - the per-gallon gas price (g1) at t=1 could take one of three possibilities:
For all questions, use risk-neutral pricing (when needed) and assume that - the per-gallon gas price (g1) at t=1 could take one of three possibilities: 13.6 (in the up-up state), 6.7 (up-down state), and 3.3 (down-down state). - p* = 0.412 - r = 4%
2. You own a food truck. To operate, you have to buy $2,000 worth of ingredients and 800 gallons of gasoline (at market price g1), and you will produce and sell 100 pounds of brisket (at per-pound market price b1). Assume that at t=1, if you want, you can decide not to operate. If you do not operate, you will have to store your truck at an expense of $1000 (paid at t=1) and you will have no other costs or revenues. What financial option is equivalent to the real option to shut down?
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