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What is the annual volatility to use for option valuation

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Question - Boeing plans to give American Airlines (AA) an option to buy wide-body 9W9 aircraft at the end of three years for $200 million, and the price of 9W9 aircraft today is $180 million. The life of the aircraft is 20 years. Boeing's business consists of 50% in commercial aircraft and 50% in defense projects. The volatility for Boeing stock is 3% per month. Airbus is 100% in the commercial aircraft business. The volatility for Airbus stock is 5% per month. The 3-year risk-free rate is 3% per year, and the twenty-year rate is 5% per year. What is the annual volatility to use for the option valuation (%/Yr.)?

Reference no: EM133089868

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