Questions for the seminar Wednesday ¡­

Questions for the seminar Wednesday 22 November:

On real options: Ex. 31.7 and 31.8 from Hull, plus:

Value a gold mine: Consider a gold mine with an estimated inventory of one million ounces and a capacity output rate of 30,000 ounces per year. The price of gold is expected to grow 3% a year. The firm owns the right to this mine for the next 20 years. The cost of opening the mine is $100 million, and the average production cost is $250 per ounce. Once initiated, the production cost is expected to grow 5% a year. The standard deviation in gold price is 20%, and the current price of gold is $375 per ounce. The riskless rate is 6%.