Use the information about the Complexico mine of Example 14.8. Chapter 14, but assume that gold prices
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Use the information about the Complexico mine of Example 14.8. Chapter 14, but assume that gold prices and interest rates are governed by the models of Example 19.3. Find the value of the Complexico lease.
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Example 14.8 (Complexico gold mine*) The Complexico gold mine was dis- cussed in Chapter 5. In this mine the cost of extraction depends on the amount of gold remaining. Hence if you lease this mine, you must decide how much to mine each period, taking into account that mining in one period affects future mining costs. We also assume now that the price of gold fluctuates according to the binomial lattice of the previous example. The cost of extraction in any year is $500 z/x, where x is the amount of gold remaining at the beginning of the year and z is the amount of gold extracted in ounces. Initially there are x0 = 50,000 ounces of gold in the mine. We again assume that the term structure of interest rates is flat at 10%. Also, the profit from mining is determined
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