Question
Sardano and Sons specializes in manufacturing steel rods and is considering leasing the only warehouse in the area that suits the firms operations. The current
Sardano and Sons specializes in manufacturing steel rods and is considering leasing the only warehouse in the area that suits the firms operations.
The current price of steel is $729 per ton. If the price of steel falls over the next six months, the company will purchase 625 tons of steel and produce 68,750 steel rods. Each steel rod will cost $17 to manufacture (ignore the time it takes to manufacture) and the company plans to sell the rods for $27 each.
If the price of steel rises or remains the same, it will not be profitable to undertake the project, and the company will allow the lease to expire without producing any steel rods.
Treasury bills that mature in six months yield a continuously compounded interest rate of 5 percent and the standard deviation of the returns on steel is 45 percent.
Use the Black-Scholes Model to determine the maximum amount that the company should be willing to pay for the lease.
Round your answer to the nearest cent.
Please do not explain it in excel, thank you.
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