Question

You have the option to open a store today at a cost of 100, which would generate profits (in PV terms of) 120. You can also delay opening the store until next year. The cost would then rise to 110. The store's profits next year have a volatility of 25% and the risk-free rate is 5% a. Using the Black and Scholes formula, what is the value of delaying the store opening? b. Should you invest today or delay?

Answer 1

One should delay the investment. As the call option price is 4.02 andr rfr is 5% one can earn this on investment and chose to invest later.

I open a store today at a cost of 100 which would generate profits (no in puterms) 120. Cost nen year volatility of = 110. profit 25% Les clo Se Ned.) - Ke-*t NC.de) die en Set (ta?) t 42 0,05 42 ra az Ouos 0.25 da zd, oogst dia en 100 + Co.ost (6. 25/2) X (10 - 0.25 di2 -0.09 + 0.68125 ? |- 0.0331 0.25 -0.035-0.25 -0,285 2 100 N(-0.035)-110 e 0.05 N(-0.285) 4.02