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Hi everyone,
Does someone understand how to determine Pe (exercise price)and Pa (current price) for BSOP model when it is about “real” option like in Q4 past paper June 2011? I can’t understand why they take 35 as exercise price and 38,75 as current price.
Thank youHi
In valuing investments (or real options) Pe is the the estimated cost of the investment, in this case $35m and Pa is the present value of the net receipts (i.e positive cash flows) which is the $38.75.- Topics: 0
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So how do you get $35m as Pe? Can I consider Pe being the PV of the estimated cost of the investment(7+6.31+28.42=41.71m)?
ok this might help u guyz … dont ever work on NPV in real options as we look for lognormal returns in option valuation remember In(pa/pe) …… now u paid 14 millions (7+7) in two years to develop the game, and to buy the exclusive rights to sell the game…. u have an option to delay the release of the game cuz u have the exlucsive right now …. now to deermine the value of that options …u need to see whats the extra investment i ll have to undertake to get the PV of 38.75 (18+12+6+3) …. the extra investment u need is 35…. u dont need to discount it …. if u have an option to buy a share at 60 dollars in ten years time …u dont need to discount 60 cuz even after 10 yearz u ll pay 60 if the option is in money
very badly explained >>>SORRY
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