Sardano and Sons is a large, publicly held company that is considering leasing a warehouse. One...

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Sardano and Sons is a large, publicly held company that isconsidering leasing a warehouse. One of the company’s divisionsspecializes in manufacturing steel, and this particular warehouseis the only facility in the area that suits the firm’s operations.The current price of steel is $751 per ton. If the price of steelfalls over the next six months, the company will purchase 700 tonsof steel and produce 77,000 steel rods. Each steel rod will cost$42 to manufacture and the company plans to sell the rods for $56each. It will take only a matter of days to produce and sell thesteel rods. If the price of steel rises or remains the same, itwill not be profitable to undertake the project, and the companywill allow the lease to expire without producing any steel rods.Treasury bills that mature in six months yield a continuouslycompounded interest rate of 4 percent and the standard deviation ofthe returns on steel is 45 percent. Use the Black-Scholes model todetermine the maximum amount that the company should be willing topay for the lease.

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Sardano and Sons is a large, publicly held company that isconsidering leasing a warehouse. One of the company’s divisionsspecializes in manufacturing steel, and this particular warehouseis the only facility in the area that suits the firm’s operations.The current price of steel is $751 per ton. If the price of steelfalls over the next six months, the company will purchase 700 tonsof steel and produce 77,000 steel rods. Each steel rod will cost$42 to manufacture and the company plans to sell the rods for $56each. It will take only a matter of days to produce and sell thesteel rods. If the price of steel rises or remains the same, itwill not be profitable to undertake the project, and the companywill allow the lease to expire without producing any steel rods.Treasury bills that mature in six months yield a continuouslycompounded interest rate of 4 percent and the standard deviation ofthe returns on steel is 45 percent. Use the Black-Scholes model todetermine the maximum amount that the company should be willing topay for the lease.