Principles of Corporate Finance

(d 1 )= ln + ( r + ) t Ps S v^2 2 v t Cumulative Normal Density FunctionCumulative Normal Density Function (d 2 ) = d 1 - v t ...

Call Option Example What is the price of a call option given the following? P = 36 r = 10% v = .40 S = 40 t = 90 days / 365 ...

Call Option (d 1 ) = ln + ( r + ) t Ps S v^2 2 v t (d 1 ) = - .3070 N(d 1 ) = 1 - .6206 = .3794 Example What is the price of a c ...

Call Option (d 2 ) = - .5056 N(d 2 ) = 1 - .6935 = .3065 (d 2 ) = d 1 - v t Example What is the price of a call option given the ...

Call Option OC = Ps[N(d 1 )] - S[N(d 2 )]e-rt OC = 36[.3794] - 40[.3065]e - (.10)(.2466) OC = $ 1.70 Example What is the price o ...

Put - Call Parity Put Price = Oc + S - P - Carrying Cost + Div. Carrying cost = r x S x t ...

Example ABC is selling at $41 a share. A six month May 40 Call is selling for $4.00. If a May $ .50 dividend is expected and r=1 ...

Example ABC is selling at $41 a share. A six month May 40 Call is selling for $4.00. If a May $ .50 dividend is expected and r=1 ...

u Real Options Principles of Corporate Finance Brealey and Myers Sixth Edition Chapter 21 ...

Topics Covered w Real Options ËFollow Up Investments ËAbandon ËWait ËVary Output or Production w Binomial Model ...

Corporate Options 4 types of “Real Options” 1 - The opportunity to make follow-up investments. 2 - The opportunity to abandon a ...

Intrinsic Value Option to Wait Option Price Stock Price ...

Intrinsic Value + Time Premium = Option Value Time Premium = Vale of being able to wait Option to Wait Option Price Stock Price ...

More time = More value Option to Wait Option Price Stock Price ...

Example - Abandon Mrs. Mulla gives you a non-retractable offer to buy your company for $150 mil at anytime within the next year. ...

Example - Abandon Mrs. Mulla gives you a non-retractable offer to buy your company for $150 mil at anytime within the next year. ...

Option to Abandon Year 0 Year 1 Year 2 120 (.6) 100 (.6) 90 (.4) NPV = 162 150 (.4) Option Value = 162 - 145 = $17 mil Example - ...

Reality w Decision trees for valuing “real options” in a corporate setting can not be practically done by hand. w We must introd ...

Probability Up = p = (a - d) Prob Down = 1 - p (u - d) a = er∆∆^ t d =e-σ σ [∆ ∆ t].5 u =eσσ^ [∆ ∆ t].5 ∆∆t = time intervals as ...

Example Price = 36 σ = .40 t = 90/365 ∆ t = 30/365 Strike = 40 r = 10% a = 1.0083 u = 1.1215 d = .8917 Pu = .5075 Pd = .4925 Bin ...