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Trading real options analysis course - business cases and software applic - Mun P.D.

Mun P.D. Trading real options analysis course - business cases and software applic - Wiley publishing , 2003. - 318 p.
ISBN 047-43001-3
Download (direct link): tradingohnathan2003.pdf
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69.51
Solutions for Expansion Option (Competitive Risks)
Creating and Solving an Expansion Option III
? Assumptions-----------
Asset Value ($) implementation Cost ($) Maturity (Years) Risk-free Rate (%) Dividends (%) Volatility (%)
Lattice Steps
Your Firm Competition
$400.00 I $400.00
$250.00
5.00
35.00% I 25.00%
i- Intermediate Calculations -
Stepping-Time (dt)
Up Step-Size (up)
Down Step-Size (down) Risk-neutral Probability (prob)
Your Firm Competition
1.0000
1.4191 1.2840
0.7047 0.7788
51.49%
I- Results -
$577.01
This exercise assumes a dynamic expansion factor that depends on a competitive firm growing at different rates.
Firmís Underlying Asset Lattice
Competitorís Underlying Asset Lattice
Expansion Factors
Option Valuation Lattice
Decision Lattice
Expand
Expand
Expand
Expand
Expand
Expand
Expand
Expand
5
Lattice Results
Continue
Continue
Continue
Continue
Continue
Continue
Continue
Continue
Continue
Continue
End
Continue
End
228
Exercise Solutions 229
Solutions for Contraction Option
Creating and Solving a Contraction Option
-Assumptions------------------------
Asset Value ($)
Maturity (Years)
Risk-free Rate (%)
Dividends (%)
Volatility (%)
Lattice Steps Savings ($)
Contraction Factor Contraction Growth Rate (%)

$1000.00
5.00
5.00%
2.00%
50.00%
5
$400.00
0.50
-5.00%

? Intermediate Calculations--------
Stepping-Time (dt)
Up Step-Size (up)
Down Step-Size (down) Risk-neutral Probability (prob)
1.0000
1.6487
0.6065
40.68%
? Results-------------
Lattice Results
$1,004.85 I
This exercise assumes a dynamic contraction factor.
Underlying Asset Lattice 12182.49 1
7389.06
4481.69 4481.69 1
2718.28 2718.28
1648.72 1648.72 1648.72 1
I 1000.00 1000.00 1000.00
606.53 606.53 606.53 1
367.88 367.88
223.13 223.13 1
135.34
82.08 1
Contraction Factors
1 0.50 0.48 0.45 0.43 0.41 0.39 1
Option Valuation Lattice 12182.49 1
7242.74
4305.96 4481.69 1
2565.04 2664.46
1561.83 1593.03 1648.72 1
1 1004.85 1008.95 996.07
709.79 695.67 634.66 1
566.01 549.82
495.65 486.33 1
455.12
431.76
230
EXERCISE SOLUTIONS
Solutions for Chooser (Contract, Expand, and Abandon) Option
Creating and Solving a Chooser Option
|- Assumptions
Asset Value ($) S100.00
Maturity (Years) 5.00
Risk-free Rate (%) 7.00%
Dividends (%) 2.00%
Volatility (%) 25.00%
Lattice Steps 5
Expansion Factor 2.50
Expansion Cost ($) S120.00
Contraction Factor 0.90
Contraction Savings ($) S50.00
Salvage Value ($) S100.00
? Intermediate Calculations--------
Stepping-Time (dt)
Up Step-Size (up)
Down Step-Size (down) Risk-neutral Probability (prob)
? Results-------------
Lattice Results
1.0000
1.2840
0.7788
53.93%
S163.15
Underlying Asset 349.03 1
271.83
211.70 211.70 1
164.97 164.97
128.40 128.40 128.40 1
1 100.00 100.00 100.00
77.88 77.88 77.88 1
60.65 60.65
47.24 47.24 1
36.79
28.65 1

Option Valuation 752.59 1
559.57
409.25 409.25 1
297.07 292.18
217.73 212.50 201.01 1
1 163.15 159.12 152.66
124.94 121.69 120.09 1
104.59 104.59
100.00 100.00 1
100.00
100.00 1

Decision Lattice Expand 1
Expand
Expand Expand 1
Continue Expand
Continue Continue Expand 1
1 Continue Continue Continue
Continue Continue Contract 1
Contract Contract
Salvage Salvage I
Salvage
Salvage I
Solutions for Simultaneous Compound Option
Creating and Solving a Simultaneous Option
- Assumptions--------------
Asset Value ($)
First Cost ($)
Second Cost ($) Maturity (Years) Risk-free Rate (%) Dividends (%) Volatility (%)
Lattice Steps
$1000.00
$800.00
$600.00
5.00
7.00%
0.00%
ē Intermediate Calculations---------
Stepping-Time (dt)
Up Step-Size (up)
Down Step-Size (down) Risk-neutral Probability (prob)
? Results -
54.46%
$253.61
Underlying Asset Lattice 4481.69 |
3320.12
2459.60 2459.60 |
1822.12 1822.12
1349.86 1349.86 1349.86 |
I 1000.00 1000.00 1000.00
740.82 740.82 740.82 I
548.81 548.81
406.57 406.57 |
301.19
223.13 |

First Option Valuation Lattice 3681.69 I
2574.20
1764.12 1659.60 |
1178.18 1076.20
767.22 665.04 549.86 I
1 488.36 397.18 279.21
232.62 141.78 0.00 1
72.00 0.00
0.00 0.00 1
0.00
0.00 1

Second Option Valuation Lattice 3081.69 |
2014.77
1251.54 1059.60 |
751.53 538.06
440.53 273.22 0.00 |
I 253.61 138.74 0.00
70.45 0.00 0.00 |
0.00 0.00
0.00 0.00 |
0.00
0.00 1

Decision Lattice (First Option) Execute I
Continue
Continue Execute I
Continue Continue
Continue Continue Execute I
1 Continue Continue Continue
Continue Continue End |
Continue Continue
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