What is the probability that the option will pay off

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An offshore oil Company has discovered new oil reserves of 70 million barrels where the cost of developing these reserves is approximately $430 million. The company has the right to exploit these reserves for the next 20 years. The development lag is 3 years. The current price and production costs are $60/barrel and $30/barrel, respectively. The cost of delay is 4% p.a, the risk-free rate is 10% p.a; the variance in oil prices is 0.04. What is the probability that the option will pay off? (Hint. You should calculate N(d2))

Reference no: EM132942083

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