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I was just trying the Mar/June 2019 sample exam, question 1 (Talem Co) has a bit about BSOP model. I’m still slightly confused by the asset and exercise price. I would have thought the asset price would have been the 30 million offer, and to exercise it this would have been the opportunity costs of the cash flows they wouldn’t recieve in year 3 and 4, rather than the other way round?
Pa ia the value of the asset, which is the PV of the future flows.
Pe is the exercise price i.e. the amount of the offer.