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Hi,
I am referring to MMC (JUN 11).
Is my understanding correct that option values determined by BSOP are the values TODAY and not at the option’s exercise date?
I am asking you this because in the answer of this question (MMC), they have calculated the value of a call option, which is $13.65 mln. This figure is DIRECTLY COMPARED to the project’s NPV of $12.73 million, which is calculated in 2-years-from-today terms (NPV of this project in today’s terms is $10.34 mln).
If BSOP shows values of options TODAY, I think NPV of the project must be determined in today’s terms also and then, these two figures compared with each other, right?
Thanks,
GigaWhere are you finding this question and answer?
I ask because I have the original exam question and the examiners answer, and the figure you are quoting do not appear anywhere 🙂
Hi,
Thanks for your feedback.I am copying from the Kaplan Exam Kit:
“Without taking account of the option to delay, the project has an NPV of
$12.73 million, which reduces to $0.73 million when the initial $12 million
investment is brought in to consideration. Although this is a positive NPV, it is quite a
small positive figure, so the project is very sensitive to changes in the cash flows.By taking account of the option to delay the project, the value of the project
increases to $13.65 million (or $1.65 million after bringing in the unavoidable
$12 million initial investment).”I may have interpreted these 2 sentences in a slightly different way in my question, but still, I think that the relevant figure for discussion should be the NPV in today’s terms (i.e. $10.34 mln) and not the NPV at the start of the project (2 years from today).
Also, as the second paragraph is linked to the previous one and I think, the same starting point (today or 2 years from today) should be used.
Anyway, ignoring what is written in the exam answers, my original question was: does BSOP show values of options as of TODAY?
Thanks a lot,
Giga
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