Alaska salvage ( dec 09 adapted)

Because you say the question is adapted, I assume that you are looking at it in the Kaplan Kit (it isn't in the current edition of the BPP Kit). I only have the original exam question and answer. In the original answer, part (a) is the valuation of the option which is $2,241. Part (b) asks for the calculation of the coupon rate to the lenders so as to give them a 13% return. So as far as the lenders are concerned, then are paying 10,000 immediately and receiving a warrant worth 2,241. So the net amount effectively being lent by them at time 0 is 10,000 less 2,241.

But the whole point of option pricing is to put a value 'today' on the option. Whether or not they will end up exercising will not be known until the option matures. 'Today's' value depends on the likelihood of it being worth exercising on the maturity date.