You are considering buying an oil field. If you buy the field, you can extract the oil in one year. There are 100 barrels of oil that can be extracted from the field; the cost of doing so is $4,000. You expect the price of oil in one year to be $50/barrel. However, there are four equally likely prices of oil in one year: $20/barrel, $35/barrel, $40/barrel, and $105/barrel.

If your discount rate is 15%, what is the value of the option to not drill when the price of oil is too low?

Answer rating: 100% (QA)

To calculate the value of the option to not drill when the price of oil is too low we ... View the full answer