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You have been asked to analyze the value of an oil company with substantial oil...

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Accounting

  1. You have been asked to analyze the value of an oil company with substantial oil reserves. The estimated reserves amount to 10 million barrels and the estimated present value of the development cost for each barrel is $12. The current price of oil is $20 per barrel and the average production cost is estimated to be $6 per barrel. The company has rights on the reserves for the next 20 years, and the 20-year treasury bond rate is 7%. The annualized standard deviation is 20%.
    1. Use the Black-Scholes model to value the call option on the oil company?
    2. What would the value of the call option be if the current price of oil is $18 per barrel?

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