Gasworks, Inc., has been approached to sell up to 3.4 million gallons of gasoline in three months...

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Gasworks, Inc., hasbeen approached to sell up to 3.4 million gallons of gasoline inthree months at a price of $2.80 per gallon. Gasoline is currentlyselling on the wholesale market at $2.70 per gallon and has astandard deviation of 59 percent.

If the risk-free rateis 5 percent per year, what is the value of this option? Use thetwo-state model to value the real option. (Enter youranswer in dollars, not millions of dollars, e.g., 1,234,567. Do notround intermediate calculations and round your answer to 2 decimalplaces, e.g., 32.16.)

  Value of contract $

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4.4 Ratings (984 Votes)

RiskFree Rate 5 Tenure of Real Option 3 months or 312 025 years Underlying Asset Gasoline Current Asset Price S0 27 per gallon and Strike Price of Real Option 28 per gallon See Answer

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Gasworks, Inc., hasbeen approached to sell up to 3.4 million gallons of gasoline inthree months at a price of $2.80 per gallon. Gasoline is currentlyselling on the wholesale market at $2.70 per gallon and has astandard deviation of 59 percent. If the risk-free rateis 5 percent per year, what is the value of this option? Use thetwo-state model to value the real option. (Enter youranswer in dollars, not millions of dollars, e.g., 1,234,567. Do notround intermediate calculations and round your answer to 2 decimalplaces, e.g., 32.16.) Value of contract$