Gasworks, Incorporated, has been approached to sell up to 4 million gallons of gasoline in three months at a price of $3.25 per gallon. Gasoline is currently selling on the wholesale market at $3.00 per gallon and has a standard deviation of 56 percent. If the risk-free rate is 7 percent per year, what is the value of this option? Use the two-state model to value the real option. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)

Gasworks, Incorporated, has been approached to sell up to 4 million gallons of gasoline in three months at a price of $3.25 per gallon. Gasoline is currently selling on the wholesale market at $3.00 per gallon and has a standard deviation of 56 percent. If the risk-free rate is 7 percent per year, what is the value of this option? Use the two-state model to value the real option. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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