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SWAN Petroleum Corp. holds a permit which entitles the company to explore and extract crude oil in a petroleum field. The field contains around 2 million barrels crude oil reserve. The permit only allows the holder to start extraction either now (t=0) or in exactly two years (t=2) at a total cost of $70 million (assume the cost remains constant regardless of time). The current crude oil price is $40/barrel and the price evolves following a binomial process. In each year of the next two years, the oil price may increase by 20% p.a. or decrease by 10% p.a. randomly. Assume the operating expense is $4/barrel and the company can complete extraction and sale once it decides to start. Risk free interest rate is 4% p.a.
Requirement: Determine whether it's optimal for the company to start extraction now or in two years.
Hint: the oil field is an asset whose value is equal to the total sales after the operating expenses.
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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