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1) Question on real options, how to derive at 30% volatility ?
2) What is the rational to calculate the total value of two real options (Jigu & Uwa) because Honua only want to buy Uwa not Jigu.
1. It is not derived – it is given in the question. The information given in the question for the Uwa project says “Talam estimates the project to have a standard deviation of 30%”
2. Talam has two options. One is to sell Uwa to Honua, but in addition they have the option of working on Jigu after Uwa and the question says that they will be able to work on Jigu whether or not they sell Uwa to Honua. (The question does not ask for the calculation of the Jigu option – the value is given in the question).
Hi,
Also related to the same exam question Talam.
Just to make sure I understand the choice between Call and Put when using the BSOP calculation:
– When we look to delay a decision it is a CALL
– When we abandon a project it is a PUT
– When it is an option to exploit a follow up project it is a CALLSo in this question, when we assess the offer to from Honua, it is like if we abandon the project which is why it is a PUT
And when we assess the other projects, it is a follow up project so it is a CALLIs that the logic we need to follow to decide between CALL and PUT?
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