Question

Sardano and Sons is a large, publicly held company that is considering leasing a warehouse. One of the company’s divisions specializes in manufacturing steel, and this particular warehouse is the only facility in the area that suits the firm’s operations. The current price of steel is $935 per ton. If the price of steel falls over the next six months, the company will purchase 525 tons of steel and produce 57,750 steel rods. Each steel rod will cost $32 to manufacture and the company plans to sell the rods for $45 each. It will take only a matter of days to produce and sell the steel rods. If the price of steel rises or remains the same, it will not be profitable to undertake the project, and the company will allow the lease to expire without producing any steel rods. Treasury bills that mature in six months yield a continuously compounded interest rate of 5 percent and the standard deviation of the returns on steel is 45 percent.

Use the Black-Scholes model to determine the maximum amount that the company should be willing to pay for the lease. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

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PE EPS, STOCK DIVIDEND-Microsoft Excel File Home Insert Page Layout Formulas Data Review View Add-Ins - Cut AutoSum A A Wrap Text Calibri 11 General Fill Copy A- Merge & Center Insert Delete Format Paste BIU S % Conditional Format Cell Sort & Find & 2 Clear Format Painter Formatting ble Styles er Select Clipboard Font Alignment Number Shules Cells Editing ON155 OE OM ON OF OG OH Ol OJ OK OF 151 152 As production will take place only if price of steel falls, it is a case of put option Here production fixed, therefore revenue is also fixed so this can be taken as put option's strike price 153 154 750750 -57750*(45-32)] 155 K= 156 and to produce 57750 steel rods, you require 525 tonnes of steel 157 158 so the amount spent on purchase of steel is taken as current price [525 X 935 S = 490875 159 160 161 S= 490875 162 K = 750750 163 0.05 a (A)= 164 0.45 0.5 [6/12] T = 165 166 d. ln (S/K) + (r+ 0.56 167 168 169 NAV HEDGE FUND MFEV PE EPS DIV deberk STOCK DIV ABNORMAL MARGIN MONEY HHIGH LOW TARGET PRICE marginal tax PB ROPI APV ROSS price quote EVA MVA 130% O) 14 Re erences: AL125 03:44 AENG 2-06-2019

PE EPS, STOCK DIVIDEND-Microsoft Excel File Home Insert Page Layout Formulas Data Review View Add-Ins - Cut Ea Copy AutoSum A A Wrap Text Calibri 11 General Fill A- Merge & Center Insert Delete Format Paste S % Conditional Format Cell Sort & Find & 2 Clear Format Painter Formatting ble Styles er Select Clipboard Font Alignment Number Shules Cells Editing ON176 OE OF OM OG OH Ol OJ OK OL ON OF 169 d1 In(490875/750750) + (0.05 +0.5*(0.45)^2 (0.5)]/(0.45*(SQRT(0.5)] 170 171 d1= -1.09761 a* SQRT(T) 172 d2 d1 d2 = -1.4158 173 174 N(d1) eM-0.03*0.5)=0.975310 175 0.136187 N(d2)= 176 0.078415 177 Value of Put oph'on 178 179 180 P = SNESI k. e 181 182 183 184 750750 e-0.05*(6/12))*(1-0.078415) VALUE OF PUT OPTION 490875 *(1-0.136187) 185 VALUE OF PUT OPTION= 186 674797.02 424024.28 187 ANSWER MAXIMUM AMOUNT = 250772.73 HHIGH LOW TARGET PRICE STOCK DIV deberk marginal tax PB ROPI APV ROSS price quote EVA MVA 130% O) 4 NAV HEDGE FUND MFEV PE EPS DIV ABNORMAL MARGIN MONEY Re erences: AL125 W 03:50 ENG 2-06-2019