use risk-neutral pricing (when needed) and assume that - the per-gallon gas price (g1) at t=1 could take one of three possibilities: 13.6 (in the up-up state), 6.7 (up-down state), and 3.3 (down-down state). - p* = 0.412 - r = 4% You own a food truck. To operate, you have to buy $2,000 worth of ingredients and 800 gallons of gasoline (at market price g1), and you will produce $10,000 in sales. Assume that all production, sales, costs, etc. happen instantaneously at t=1.

a. What is this project worth today assuming you have no options (you have to operate at t=1). b. If you wanted to remove all risk, how would you hedge the project in part a? c. Now assume that at t=1, if you want, you can decide not to operate. If you do not operate, you will have to store your truck at an expense of $1000 (paid at t=1) and you will have no other costs or revenues. What is the project worth today?

d. What financial option is equivalent to the real option in part c? e. How much is the real option worth today? f. If you wanted to remove all risk, how would you hedge the project in part c?