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
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ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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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.)
Answer is complete but not entirely correct.
$
Value of contract
COLOU
-3.13 x
Transcribed Image Text: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.) Answer is complete but not entirely correct. $ Value of contract COLOU -3.13 x
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