Hi,
Refering to the video where you have solved the question
https://www.youtube.com/watch?v=J_jyzuILjy4
Time stamp at 21:36
I see that to find the exercise price you have taken the amount being offered.
And to find the current value you have taken the PV of the cashflows from year 3-5
My question was, why shouldnt we make the 28 million into present value as well?
Its not fair to compare the PV of the current price to the undiscounted exercise price is it?
*Sorry this might sound like a stupid question. It just came into my head and I cant get rid of it.
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Option pricing- Dec 13
7y ago#1It is because the option is exercisable at $28M in 2 years time, and Pe is the exercise price - not the PV of the exercise price. (What Pe is multiplied by in the formula is effectively doing the discounting as though it is on a continuous basis rather than in whole years as we normally do)
Thank you!
7y ago#3You are welcome :-)
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