Arizona State University FIN FIN 40257 A: suppose the price of copper in a good state is $1.20, and in a…

Arizona State University FIN FIN 40257 A: suppose the price of copper in a good state is $1.20, and in a…

suppose the price of copper in a good state is $1.20, and in a bad state $0.40, while everything else is the same: the forward price is $0.60. The explorations costs are $0.80. The risk-free discount rate is 5%. The amount is 75m pounds

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  • You would like to value the mine with the option to shut down.

1) The implied probability π of the good state is:

2) The expected value of the mine is:

3) Is the option to wait more or less valuable with volatility of the copper price?

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