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Hello sir,
In this question the examiner calculate the value of the call option to be 11.53 which is the previous NPV + Call option figure !4 NPV + 7.53
Is this treatment correct ? Or we should calculate the value of the option as 7.53-4 =3.53
Please assist, and thanks in advanceThis question was set by a previous examiner, and his answer was wrong (the current examiner has confirmed that it was wrong).
Using your figures above, the NPV with the option is 7.53M and the NPV without the option is 4M.
The benefit of the option is therefore the difference of 3.53M.
(The reason that I write ‘using your figures’ is the the examiners own answer had the NPV with the option as being 7.48M and not 7.53M, but this will just be due to rounding and would not lose marks. However it makes me think that maybe you found the question somewhere else (but it is not in the current edition of the BPP Revision Kit). If so, then I am surprised that the answer has not been updated to correct the error 🙂 )
As you may already have seen, I do work through an almost identical question in my free lecture on real options.
Thank you sir , its clear now . Yes The question is not from BBP revision kit , I found it on an online website !
Thanks again.
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