Gasworks, Incorporated, has been approached to sell up to 2.6 million gallons ofgasoline in three months at a price of $2.55 per gallon. Gasoline is currently selling onthe wholesale market at $2.30 per gallon and has a standard deviation of 60 percent.If the risk-free rate is 6 percent per year, what is the value of this option? Use the two-state model to value the real option. (Do not round intermediate calculations andenter your answer in dollars, not millions of dollars, rounded to 2 decimal places,e.g., 1,234,567.89.)Value of contract

A two-state model refers to the method of calculating the price of the option where the final value…

Answered: Gasworks, Incorporated, has been…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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A rice importer is going to sell rice in one year. In order to lock in a fixed selling price, the importer buys a put option and sells a call option on each ton of rice, each with the same strike price and the same one-year expiration date. The current price of rice is 360 per ton, and the net premium that the importer pays now to lock in the future price is 12 per ton. The continuously compounded risk-free interest rate is 6%. Calculate the fixed selling price per ton of rice one year from now.
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