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PROBLEM 12-5: Valuation an American Option Given Risk-neutral probability 0.4626 Risk free Interest rate 5% Discount factor = exp(-Risk free interest rate) Strike (in $
| PROBLEM 12-5: Valuation an American Option | ||||||||||||
| Given | ||||||||||||
| Risk-neutral probability | 0.4626 | |||||||||||
| Risk free Interest rate | 5% | |||||||||||
| Discount factor = exp(-Risk free interest rate) | ||||||||||||
| Strike (in $ millions) | $ 23.00 | |||||||||||
| Solution | ||||||||||||
| Today | Year One | Year Two | Year Three | |||||||||
| | $ 35.8300 | |||||||||||
| | $ 31.7800 | |||||||||||
| | $ 28.1900 | $ 26.5500 | ||||||||||
| Text Color Legend | ||||||||||||
| Value of Beginning Oil Field Operations Now | $ 25.000 | $ 23.5500 | ||||||||||
| NPV of waiting (NPV-Waiting) | ||||||||||||
| NPV of Exercising Now (NPV-Now) | ||||||||||||
| Value of American Option = max (NPV-Waiting,NPV-Now) | $ 20.8800 | $ 19.6600 | ||||||||||
| Cell Outline Legend | ||||||||||||
| $ 17.4400 | ||||||||||||
| Stock | ||||||||||||
| Wait | $ 14.5700 | |||||||||||
| Exercise - drill | ||||||||||||
| Impossible node | ||||||||||||
| a. | ||||||||||||
| b. | ||||||||||||
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Short Term Financial Management
Authors: Terry S. Maness, John T. Zietlow
3rd Edition
0324202938, 978-0324202939
