Great Deal! Get Instant $10 FREE in Account on First Order + 10% Cashback on Every Order Order Now # password to the pdf:advfin20 1 answer below Â» password to the pdf:advfin20 Answered Same Day Jul 16, 2021 ## Solution Sumit answered on Jul 18 2021 1. (a) Given: u 1.2 d 0.9 time 10 Years Rate 10% Spot Price 10 Million Expected lower Future Spot price(P1) 9 Million Expected Upper Future Spot price(P2) 12 Million Formula for calculating the probability of higher price is: [(ert â€“ 0.90) / (1.20 â€“ 0.90)] = [(1.11 â€“ 0.90) / (0.30)] = 70% Formula for calculating the probability of lower price is: = [(1.20 - ert) / (1.20 â€“ 0.90)] = [(1.20 â€“ 1.11) / (0.30)] = 30% As per the calculations made in the excel file, we can see that the value of option has started decreasing at the end of year 5. Hence, we should cut the trees at 5th year and not till the trees are growing. (b) It is optimal to cut in the 1st year because after that the value of investment has started decreasing due to rent. The value of Investment =$9.56 million
(Note: The calculations are made in the Excel file).
2. Given:
Cu
ent Gold Price = $1500 u = 1.20 Value at upper limit (Cu)= 1500 x 1.20 =$1800
D = 0.90
Value at lower limit (Cd)= 1500 x 0.90
= $1350 Time (t) = 3 years Rate (r) = 2% Formula for calculating the value of an Option: Cu x [(ert â€“ 0.90) / (1.20 â€“ 0.90)] + Cd x [(1.20 - ert) / (1.20 â€“ 0.90)] = 1800 x [(1.06 â€“ 0.90) / (0.30)] + 1350 x [(1.20 â€“ 1.06) / (0.30)] = 960 + 630 =$1590
(a) The value of this investment Opportunity is:
PV of Gold Value â€“ PV of Fixed cost â€“ PV of Variable cost â€“ Initial Investment cost
= (1590 x 10000 x 3) â€“ (10000000 / 1.06) â€“ [(500 x 10000 x 3) / 1.06] â€“ 1,500,000
= 47,700,000 â€“ 9,433,962 â€“ 14,150,943 â€“ 1,500,000
= $22,615,095 Hence the value of this Investment Opportunity is$22,615,095.
(Note: The calculations are made in the Excel file)
3.
(a) Given:
Dividend Yield Rate = n
Cu
ent Stock Price = So
Stock Price Volatility =
Total Return from Stock =
Growth rate = r - n
The expected stock price using Gordonâ€™s Growth Model is:
= So x (1 + r - n) / r â€“ r +n
= So x (1 + r - n) / n
Hence the expected stock price at maturity T is So x (1 + r - n) / n.
(b) The expected pay-off from the call option is:
Variable...
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