Copper mining is becoming more prevalent because of the increasing demand in Asia. Assume that you...

 

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Copper mining is becoming more prevalent because of the increasing demand in Asia. Assume that you have the rights to a copper mine and the most recent valuation of the mine was 8.5 million. Because of the increasing demand from Asia, the price of similar mines has grown by 20 percent per annum, with an annual standard deviation of 30 percent. A buyer has recently approached you and wants an option to buy the mine in the next 12 months for 9 million. The risk free rate of interest is 5 percent per year, compounded continuously. How much should you charge for the option using a Black-Scholes model? (20 marks) Copper mining is becoming more prevalent because of the increasing demand in Asia. Assume that you have the rights to a copper mine and the most recent valuation of the mine was 8.5 million. Because of the increasing demand from Asia, the price of similar mines has grown by 20 percent per annum, with an annual standard deviation of 30 percent. A buyer has recently approached you and wants an option to buy the mine in the next 12 months for 9 million. The risk free rate of interest is 5 percent per year, compounded continuously. How much should you charge for the option using a Black-Scholes model? (20 marks)

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