Revised Shockley, Chapter 10 Problems:
Problem 1:
Problem 2:
Problem 3:
Problem 4:
Pricing Tree:
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
35.26
50.04
71.00
100.76
142.99
202.91
24.85
35.26
50.04
71.00
100.76
17.51
24.85
35.26
50.04
12.34
17.51
24.85
12.34
Value of Land Rights (in millions):
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
115.95
255.10
545.71
983.93
1605.79
2488.26
42.99
103.78
243.18
545.71
983.93
10.50
29.66
83.83
236.90
Problem 5:
Pricing Tree:
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Value of Land Rights (in millions):
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
The mining firm should not make the bid of $100 million because the rights are worth
$62.68 million.
Problem 6:
The minimum spot price for early exercise in the 35% volatility tree is $71.00.
Problem 7:
Value of Land Rights (in millions)
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Problem 8:
Pricing Tree:
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
35.26
50.04
71.00
100.76
142.99
202.91
24.85
35.26
50.04
71.00
100.76
17.51
24.85
35.26
50.04
12.34
17.51
24.85
12.34
Value of Land Rights (in millions):
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
111.19
248.90
545.71
885.53
1605.79
2488.26
38.69
93.40
218.87
545.71
983.93
26.70
83.83
236.90
The land rights are worth $111.19 million.
Problem 9:
Pricing Tree:
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
35.26
50.04
71.00
100.76
142.99
202.91
24.85
35.26
50.04
71.00
100.76
17.51
24.85
35.26
50.04
12.34
17.51
24.85
12.34
10.50
29.66
83.83
236.90
Value of Land Rights (in millions):
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
96.67
236.90
545.71
491.96
1605.79
2488.26
The land rights are worth $96.67 million.
Early exercise in Year 1 would occur if the spot price became $50.04. Notice, the option
Problem 10:
21.50
51.89
121.59
545.71
983.93
14.83
83.83
236.90