Mini-Case for class discussion for Lecture 10
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Monash University Malaysia
BFW3540 Modelling in Finance
Case Study
Let’s Refuel America
On May 7, 2008, Chrysler, in the US, announced a deal called “Let’s Refuel America”,
where the purchaser of certain new models of vehicles would receive a card that allows
the holder to purchase a gasoline or diesel fuel that locks in the price at $2.99 a gallon for
three years with 12,000 miles of driving a year. Please read the “Chrysler Deal.PDF” files
for more information.
(a) Estimate the value of this Deal to the potential buyer for the following two
models:
Dodge Caliber: 24 MPG
Dodge Ram: XXXXXXXXXXMPG
So, the buyers of Dodge Caliber can purchase up to 500 gallons of gasoline at
$2.99 per gallon per year, and the buyer of Dodge Ram can purchase up to 800
gallons at $2.99 per gallon per year for the next three years.1
Use as many different methods or models as your group can think of. Also,
discuss the limitations and attractiveness of each of the methods or models you
use.
When valuing the Deal use the following information:
i. Assume that the spot gasoline price at the time of the Deal's valuation
is $3.613 per gallon.
ii. Assume that the risk-free interest rate is 1.55% compounded
continuously.
iii. If you need the historical gasoline prices, use the “U.S. All Grades
Conventional Retail Gasoline Prices” contained in the posted Excel file –
use Sheet named “Data 1” column B.
(b) If you have to choose between this Deal and $1,550 rebate, which one would you
choose for which model? The choice is either get the Deal that allows you to
1 This is a three-year deal. The buyer of the Dodge Caliber can buy enough gasoline to drive 12,000 miles
per year or 12,000/24 =500 (gallons) every year for the next three years. Similarly, for Dodge Ram, the
miles per gallon (MPG) is only 15, the buyers of Dodge Ram can purchase 12,000/15 = 800 gallos per year.
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purchase 500 gallons (Dodge Caliber) or 800 gallons (Dodge Ram) at $2.99 per
gallon per year for the next three years or you take a cash rebate of $1,550 instead
of the Deal. The rebate will reduce the price by $1,550.
Discuss the risk implication of taking the rebate.
Information attached or posted:
1. Description of the Deal as reported by USA TODAY (PDF filename: Chrysler
Deal.pdf).
2. Historical weekly gasoline price from EIA (Excel filename: “Weekly gasoline
price.xls”) U.S. All Grades Conventional Retail Gasoline Prices (Cents per
Gallon) given in Column B.
Please note the following about the Deal.
1. Each buyer of the two models under consideration will receive a card, a sample
image of the card is given below:
This card will be used every time you
exercise the option to purchase gaoline
at $2.99 per gallon. The computer
system will keep track of how many
gallons of gasoline you have already
purchased at $2.99 in a year, and, if this
amount exceeds 500 gallons for Caliber
or 800 for Ram, you cannot exercise the
option because you would have
exceeded the limit for the year. You need to wait for the next year if it is within the 3-
year limit.
2. After three years, the card would expire.
Please note the following about the presentation and submission of the presentation
slide:
1. This is a group project, which requires an in-class presentation.
2. You submit the presentation slide by 11:59 PM, October 11, 2021. The submitted
slides could be either a PowerPoint slide or PDF document. But, you can use
other methods for presentation. You do not need to submit a separate report – I
will grade based on the slides and presentation. Each group also requires to
submit the Excel file used for the computation.
The presentation will be done during the workshop time slot (on October 12) or
Tutorial slots. I will ask for volunteers for early presentations. If that does not
work out, I will pick the sequence of presentations randomly.
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3. The presentations will be done on October 12 & 13, 2021, during workshop or
tutorials – more information will be posted on the presentation schedule. The
presentation should consist of (i) Introduction, (ii) Methodology, (iii) Results, and
(iv) Conclusion. Your Result Section should contain a table showing the value of
the dDal for each model of vehicle – one row per method.
Method Deal Value
(Dodge Caliber)
Deal Value
(Dodge Ram)
Rebate Value
Method 1 $1,550
Method 2 $1,550
: : : :
4. Each presentation should last approximately 8 minutes, and each group member
must do the presentation.
Note on the following regarding the analysis:
The following steps need to be clear:
(a) First, you need to be clear on what option you are valuing, which needs to specify
five variables: (1) spot price, (2) risk-free interest rate, (3) time to expiration, (4)
volatility, and (5) exercise price.2
(b) You need to clearly specify values you used for these variables and
iefly
explain where did you get values of these variables (given to you as instructed by
me or
iefly mention the estimation method if you estimated them). For example,
how did you estimate volatility – you do not need to put the formula for sample
standard deviation – simply saying sample standard deviation from the series
starting from time x to time xx.
The grading is based on the following:
(1) The number of different methods you use and different assumptions you make.
Simply presenting many different methods that does not add value to the models
already presented will not get any extra marks. It may help if you mention the
easons behind not using certain models.
(2) Co
ectness of your presentation and what you say during the presentation.
(3) Quality of the presentation – clarity, confidence, feels that you know what you are
talking about.
2 Note that this is not a textbook exercise but a real world situation. Therefore, you need to make some
easonable assumptions regarding the values of these five variable. Ofcourse, the values of some of these
variables are given to you, e.g., the spot price ($3.613 per gallon), risk-free rate ( 1.55% continuously
compounded), and exercise price ($2.99 per gallon).
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(4) Appearance of presentation slides matters but not much – so spending more time
on beautifying the slides rather than making sure the materials are co
ect is not
useful. For example, you have a beautiful presentation, but the models are not
suitable, and values of the variables are wrong, then you will not receive high
marks. First, the results and models have to be co
ect or suitable for the beauty of
the presentation to be considered.
(5) Finally, it also depends on how your presentation and the content of the
presentation compare with that of others.
Contents
Workbook Contents
U.S. All Grades and All Formulations
Click worksheet name or tab at bottom for data
Worksheet Name Description # Of Series Frequency Latest Data fo
Data 1 All Grades Conventional 20 Weekly 5/5/2008
Data 2 All Grades Reformulated 18 Weekly 5/5/2008
Data 3 All Grades, Areas and Formulations 28 Weekly 5/5/2008
Release Date: 5/5/2008
Next Release Date: 5/12/2008
Excel File Name: pswrgvwag.xls
Available from Web Page: http:
www.eia.doe.gov/oil_gas/petroleum/data_publications/wrgp/mogas_history.html
Source: Energy Information Administration
For Help, Contact: XXXXXXXXXX
XXXXXXXXXX 5/5/2008 4:08:08 PM
Data 1
Data 2
Data 3
http:
www.eia.doe.gov/oil_gas/petroleum/data_publications/wrgp/mogas_history.html
Energy Information Administration
XXXXXXXXXX
Data 1
Back to Contents Data 1: All Grades Conventional
Sourcekey MG_TCO_US MG_TCO_P1 MG_TCO_1A MG_TCO_1B MG_TCO_1C MG_TCO_P2 MG_TCO_P3 MG_TCO_P4 MG_TCO_P5 MG_TCO_CO MG_TCO_FL MG_TCO_MN MG_TCO_NY MG_TCO_OH MG_TCO_TX MG_TCO_WA MG_TCO_CL MG_TCO_D4 MG_TCO_M1 MG_TCO_SE
Date U.S. All Grades Conventional Retail Gasoline Prices (Cents per Gallon) East Coast All Grades Conventional Retail Gasoline Prices (Cents per Gallon) New England (PADD 1A) All Grades Conventional Retail Gasoline Prices (Cents per Gallon) Central Atlantic (PADD 1B) All Grades Conventional Retail Gasoline Prices (Cents per Gallon) Lower Atlantic (PADD 1C) All Grades Conventional Retail Gasoline Prices (Cents per Gallon) Midwest All Grades Conventional Retail Gasoline Prices (Cents per Gallon) Gulf Coast All Grades Conventional Retail Gasoline Prices (Cents per Gallon) Rocky Mountain All Grades Conventional Retail Gasoline Prices (Cents per Gallon) West Coast All Grades Conventional Retail Gasoline Prices (Cents per Gallon) Colorado All Grades Conventional Retail Gasoline Prices (Cents per Gallon) Florida All Grades Conventional Retail Gasoline Prices (Cents per Gallon) Minnesota All Grades Conventional Retail Gasoline Prices (Cents per Gallon) New York All Grades Conventional Retail Gasoline Prices (Cents per Gallon) Ohio All Grades Conventional Retail Gasoline Prices (Cents per Gallon) Texas All Grades Conventional Retail Gasoline Prices (Cents per Gallon) Washington All Grades Conventional Retail Gasoline Prices (Cents per Gallon) Cleveland, OH All Grades Conventional Retail Gasoline Prices (Cents per Gallon) Denver, CO All Grades Conventional Retail Gasoline Prices (Cents per Gallon) Miami, FL All Grades Conventional Retail Gasoline Prices (Cents per Gallon) Seattle, WA All Grades Conventional Retail Gasoline Prices (Cents per Gallon)
Nov 28, 1994 117.5 120.8 123.2 126.2 119.2 112.2 120.9 122.6
Dec 05, 1994 114.3 118.3 120.2 124.9 116.1 108.6 117.7 121.5
Dec 12, 1994 111.8 116 118.5 123 113.7 105.7 116 120.6
Dec 19, 1994 109.9 114.1 116.6 121.5 111.7 103.9 114.9 117.5
Dec 26, 1994 108.8 113.4 116.1 121.1 110.9 102.7 113.6 115.3
Jan 02, 1995 110.4 111.9 115.9 121 109.4 102.5 112.9 116.8 128.1
Jan 09, 1995 111.1 111.8 115.4 120.8 109.3 104.6 113 115.7 128.1
Jan 16, 1995 110.2 111.4 115.3 119.7 109 103.1 112.8 114.7 127.6
Jan 23, 1995 111 111.2 114.9 119.1 109 105.4 112.2 115.7 127.2
Jan 30, 1995 110.9 111.1 114.9 118.4 109.1 105.5 112.6 114.3 126.8
Feb 06, 1995 110.3 110.9 115.1 118 108.8 104.5 112.4 113.1 126.2
Feb 13, 1995 109.9 110.4 114.6 117.5 108.4 104 111.6 113.9 125.5
Feb 20, 1995 109.3 110.1 114.4 117 108.1 103.1 111 113 125.5
Feb 27, 1995 110.1 110.1 114.4 116.5 108.3 105.2 111.7 111.9 125.6
Mar 06, 1995 110.3 110.2 114.2 116.3 108.5 105.3 111.6 114.6 125.4
Mar 13, 1995 109.6 109.9 114.2 116 108.1 104.2 111.2 113.2 125.3
Mar 20, 1995 109.5 109.5 114.2 115.4 107.8 104.8 110.2 112.1 125.3
Mar 27, 1995 110.2 109.4 113.3 115.2 107.8 106.5 110.5 115.1 124.4
Apr 03, 1995 111.6 110.1 113.7 115.5 108.5 109.1 111.8 114.5 125.2
Apr 10, 1995 113.4 111.5 114.4 116.2 110.2 110.9 113.9 117.6 126.3
Apr 17, 1995 114.9 113.6 115.1 117.7 112.5 112.3 115.9 117.1 127.1
Apr 24, 1995 117.3 116.6 117.2 120 115.6 114.8 118.4 116.3 128.2
May 01, 1995 118.1 117.9 118.9 122 116.7 114.4 120.2 119 129.3
May 08, 1995 120.4 120.5 120.4 124.6 119.4 117