Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Basic Finance Expert

Valuing an American option: J & B Drilling Company has recently acquired a lease to drill for Natural gas in the remote region of southwest Louisiana and southeast Texas. The area has long been known for oil and gas production, and the company is optimistic about the prospects of the lease. The lease contract has a three-year life and allows J &B to begin exploration at any time up until the end of the three-year term.

J & B's engineers have estimated the volume of the natural gas they hope to extract from the leasehold and have placed a value of $25 million on it, on the condition that explorations begin immediately. The cost of developing the property is estimated to be $23 million (regardless of when the property is developed over the next three years). based on the historical volatilities in the returns of the similar investments and other relevant information, j & B's analysts have estimated that the value of the investment opportunity will evolve over the next three years.

The risk-free rate of interest is currently 5%, and the risk-natural probability of an uptick in the value of the investment is estimated to be 46.26%.

a. Evaluate the value of the leasehold as an American call option. What is the lease worth Today?

b. As one of J & B's analysts, what is your recommendation as to when the company should begin drilling?

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M942666

Have any Question? 


Related Questions in Basic Finance

Assignment- tvm- tth classbullsubmit using assignment tab

Assignment- TVM- T/Th class • Submit using Assignment tab in eLearning by uploading your completed excel file. • Open a new (fresh) excel workbook to perform you calculations. • You are allowed only one submission, so pl ...

What is a depository institutionwhat is a checkable deposit

What is a depository institution? What is a checkable deposit? How does a depository institution differ from other intermediaries? Give three examples of depository institutions.

Assume that the fed is targeting an interest rate and the

Assume that the Fed is targeting an interest rate and the demand for money increases. Explain why the money supply will increase.

Suppose you borrow 300000 at 7 for 30 years with 0 points

Suppose you borrow $300,000 at 7% for 30 years with 0 points. Suppose also that the mortgage note includes a prepayment penalty of 1% of the mortgage balance if the mortgage is prepaid within 10 years. What is the effect ...

Changes in money were more highly correlated with changes

Changes in money were more highly correlated with changes in nominal GDP than with changes in either real GDP or inflation. Does this finding support or refute monetarism? Explain.

Finance assignmentrequirements-callimbah inc is a

Finance Assignment REQUIREMENTS- Callimbah Inc. is a successful company that is involved in the  business consultancy sector. Callimbah Inc.  provides both accounting and business advisory services to small and medium si ...

A small eastern european economy asks your opinion about

A small Eastern European economy asks your opinion about whether they should pursue the path to joining the European Economic and Monetary Union (EMU) or simply "euroize" (i.e., dollarize by using the euro for all domest ...

1 youve decided to capitalize 100 of your new business by

1. You've decided to capitalize 100% of your new business by obtaining a loan from a local bank. Your initial funding will A. include personal and equity financing. B. include equity and start-up financing. C. consist of ...

Using the loanable funds theory show in a graph how each of

Using the loanable funds theory, show in a graph how each of the following events affects the supply and demand for loans and the equilibrium real interest rate: a. A war leads the government to increase spending on the ...

Assignment 3assignment 3 is due after you complete lessons

Assignment 3 Assignment 3 is due after you complete Lessons 9 to 11. It is worth 20% of your final grade. Prepare your responses to these assignment problems in a word processing file; put financial data in a spreadsheet ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

A cola-dispensing machine is set to dispense 9 ounces of

A cola-dispensing machine is set to dispense 9 ounces of cola per cup, with a standard deviation of 1.0 ounce. The manuf

What is marketingbullwhat is marketing think back to your

What is Marketing? • "What is marketing"? Think back to your impressions before you started this class versus how you

Question -your client david smith runs a small it

QUESTION - Your client, David Smith runs a small IT consulting business specialising in computer software and techno

Inspection of a random sample of 22 aircraft showed that 15

Inspection of a random sample of 22 aircraft showed that 15 needed repairs to fix a wiring problem that might compromise

Effective hrmquestionhow can an effective hrm system help

Effective HRM Question How can an effective HRM system help facilitate the achievement of an organization's strate