What is the value of this option

Reference no: EM133633084

Question: Gasworks, Incorporated, has been approached to sell up to 2.8 million gallons of gasoline in three months at a price of $2.70 per gallon. Gasoline is currently selling on the wholesale market at $2.40 per gallon and has a standard deviation of 62 percent. If the risk-free rate is 7 percent per year, what is the value of this option? Use the two-state model to value the real option.

Reference no: EM133633084

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