In: Finance
Jet Black is an international conglomerate with a petroleum division and is currently competing in an auction to win the right to drill for crude oil on a large piece of land in one year. The current market price of crude oil is $126 per barrel and the land is believed to contain 534,000 barrels of oil. If found, the oil would cost $127 million to extract. Treasury bills that mature in one year yield a continuously compounded interest rate of 6 percent and the standard deviation of the returns on the price of crude oil is 60 percent. |
Use the Black-Scholes model to calculate the maximum bid that the company should be willing to make at the auction. |