PROBLEM 12-5: Valuation an American Option
Given
Risk-neutral probability
Risk free Interest rate
Discount factor = exp(Risk free interest rate)
Strike (in $ millions)
0.4626
5%
$
23.00
Solution
Today
Year One
Year Two
Year Three
$
$
Text Color Legend
Value of Beginning Oil Field Operations Now $
NPV of waiting (NPV-Waiting)
NPV of Exercising Now (NPV-Now)
Value of American Option = max (NPV-Waiting,NPV-Now)
$
$
14.5700
31.7800
28.1900
25.000
19.6600
$
$
26.5500
$
$
35.8300
23.5500
20.8800
Cell Outline Legend
$
17.4400
Stock
Wait
Exercise
a.
Solution Legend
= Value given in problem
= Formula/Calculation/Analysis required
= Qualitative analysis or Short answer required
= Goal Seek or Solver cell
= Crystal Ball Input
= Crystal Ball Output
