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“Digunder has an option to purchase a plot of land in Newtown, at an agreed price of
$24 million, which must be exercised within the next two years.”To find out Value of underlying asset, we take PV of future CF excluding initial investment so i get it why they did $4m+24m
My question is why $24m..the $24m is the exercise price of land after 2 years…so wouldn’t the initial investment value of land and exercise price of land after 2 years be different?
So the initial investment in land would be the “current” value of landHope u understood my query sir..
Have they assumed the initial investment price in land is also $24m?The initial investment will be $24M because that is the agreed price. The option is to buy it (at $24M) at any time during the next two years.
Got it…1 more thing
Digunder has an option to purchase a plot of land in Newtown, at an agreed price of
$24 million, which must be exercised “within” the next two years.
Doesn’t this sound like an American option whereas Black scholes is used for European options…Isn’t it contradictory sir??Yes it would but the requirement asks for the value of delaying for two years (not within two years).
(Also, in the exam, you can only ever be expected to value European style options because that is the only formula that is provided.)
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