Monte Carlo Simulations and Real Options

A pharmaceutical company has developed a vaccine that is specific for the Omicron variant of COVID 19. The company is now deciding whether or not to spend the money to test the vaccine and apply for government approval. Testing the vaccine will cost $36000 and take 6 months. However, it is expected to have a probability of success and approval of 0.82. The current market value for the vaccine is estimated to be $580000. The cost of bringing it to market after approval is estimated at $540000. Based on these numbers the expected profit from the vaccine is: 0.82*($580000 - $540000) - $36000 = $3200.0, which is not economically viable.. However, the company is thinking that a real options analysis might show that testing and seeking approval for the vaccine because the market value of the vaccine is highly volatile, since it depends upon whether a new variant arises, and whether that variant is related to the existing Omicron variant, or whether it is an entirely new variant. The company estimates that the monthly volatility is 0.11. Conduct a real options analysis using 2 time-steps to determine the value of testing and seeking approval for the vaccine. The discount rate to be used for the analysis is 9% and the risk free rate is 2%. All answers should have at least 4 significant figures. What is the value of u? What is the value of d? What is the value of P(u)? What is the value of P(d)? Determine the Binomial Lattice for the Underlying Asset values: Determine the binomial Lattice for the Option values: Based on your real options analysis what is the better choice? Test the vaccine and apply for approval O Do not test the vaccine A pharmaceutical company has developed a vaccine that is specific for the Omicron variant of COVID 19. The company is now deciding whether or not to spend the money to test the vaccine and apply for government approval. Testing the vaccine will cost $36000 and take 6 months. However, it is expected to have a probability of success and approval of 0.82. The current market value for the vaccine is estimated to be $580000. The cost of bringing it to market after approval is estimated at $540000. Based on these numbers the expected profit from the vaccine is: 0.82*($580000 - $540000) - $36000 = $3200.0, which is not economically viable.. However, the company is thinking that a real options analysis might show that testing and seeking approval for the vaccine because the market value of the vaccine is highly volatile, since it depends upon whether a new variant arises, and whether that variant is related to the existing Omicron variant, or whether it is an entirely new variant. The company estimates that the monthly volatility is 0.11. Conduct a real options analysis using 2 time-steps to determine the value of testing and seeking approval for the vaccine. The discount rate to be used for the analysis is 9% and the risk free rate is 2%. All answers should have at least 4 significant figures. What is the value of u? What is the value of d? What is the value of P(u)? What is the value of P(d)? Determine the Binomial Lattice for the Underlying Asset values: Determine the binomial Lattice for the Option values: Based on your real options analysis what is the better choice? Test the vaccine and apply for approval O Do not test the vaccine