At 9:28, the expected cost of delay (5.89%) will lead to zero EV at the end of the 17th year, while 5.89% dividend yield, which is always relative to the prevailing price will not lead to zero EV (or stock price) at the end of the 17th year. So the equivalent dividend yield probably should be somewhat higher than 5.89%, which will result in a somewhat lower option premium (i.e., < $907m) that is closer to the simple DCF model estimate of $3.422b - 2.875b.
At 12:45, assuming the natural resources do not need to be relinquished (i.e., it can be delayed as long as you wish), the dividend yield should not be the net production revenue, as they are not foregone as buying a stock post ex-dividend date, they are merely postponed to a later year. Hence, the choice of a suitable dividend yield is kind of arbitrary, maybe it should be set as the percentage cost of carrying the land for every year that it is undeveloped.
in that scenario, if we apply option pricing then in all cases the value of underlying instrument will be higher than as derived from DCF. As option pricing restrict the downsize risk. In that sense are we not overvaluing the underlying instrument.
Why is the PV of cash flows from the oil reserve discounted at a risk free rate ? Shouldn't we discount w.r.t. to the cost of capital of the project as there is a certain risk in the project
+Aparna Yadav If we delay production, we still have the unused funds which can be invested in treasury bills, for example, so the return with risk free rate can still be realized. But the net gain would have to include loss caused by delaying, so that's why, I would say.
d1 and d2 is given by the Black Scholes model, given everything it was assumed during the session (S, K, time to exercise, cost of delay, and variance) N(d1) and N(d2) assume a normal distribution - also given by the BS model
At 9:28, the expected cost of delay (5.89%) will lead to zero EV at the end of the 17th year, while 5.89% dividend yield, which is always relative to the prevailing price will not lead to zero EV (or stock price) at the end of the 17th year. So the equivalent dividend yield probably should be somewhat higher than 5.89%, which will result in a somewhat lower option premium (i.e., < $907m) that is closer to the simple DCF model estimate of $3.422b - 2.875b.
Thank you for another awesome lesson!
At 12:45, assuming the natural resources do not need to be relinquished (i.e., it can be delayed as long as you wish), the dividend yield should not be the net production revenue, as they are not foregone as buying a stock post ex-dividend date, they are merely postponed to a later year. Hence, the choice of a suitable dividend yield is kind of arbitrary, maybe it should be set as the percentage cost of carrying the land for every year that it is undeveloped.
in that scenario, if we apply option pricing then in all cases the value of underlying instrument will be higher than as derived from DCF. As option pricing restrict the downsize risk. In that sense are we not overvaluing the underlying instrument.
Why is the PV of cash flows from the oil reserve discounted at a risk free rate ?
Shouldn't we discount w.r.t. to the cost of capital of the project as there is a certain risk in the project
so what does expected cost of delay means and how does it apply into Black Scholes model?
Thank you sir!!
How did you calculate d1? My answer differs. (0.174 172501 + (0.0081 + 0.025088)(17))/(0.224*4.1231) = 0.738368501/0.92357566 = 0.7995
Can NFT be valued using option?
Well explained
slides: people.stern.nyu.edu/adamodar/pdfiles/eqnotes/optdelay.pdf
Why Cost of delay is subtract from risk free rate?
Both Risk free rate and Cost of representation of how much money is lost if we delay the production
+Aparna Yadav If we delay production, we still have the unused funds which can be invested in treasury bills, for example, so the return with risk free rate can still be realized. But the net gain would have to include loss caused by delaying, so that's why, I would say.
How d1,d2, N(d1) and N(d2) calculated?
d1 and d2 is given by the Black Scholes model, given everything it was assumed during the session (S, K, time to exercise, cost of delay, and variance)
N(d1) and N(d2) assume a normal distribution - also given by the BS model
Awesome lecture... Thanks a lot