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

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

The implied probability π of the good state is:                           

The expected value of the mine is:                              

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

B: Now suppose that the price of copper always remains at 0.60, but instead the extraction costs are uncertain (e.g. labor costs can become higher or lower) This usually called “input cost uncertainty”.

• Does it have the same effect on the value of the mine as uncertainty over the price of copper?          

Answer rating: 100% (QA)

ANSWER ITEM 1 Implied Probability of Good State 25 ITEM 2 7500000 if no time value of money 714285714 if with time value of money Note I did not see a... View the full answer