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FIN - Puma is an international conglomerate

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Question;Problem help (need to run Monte Carlo Simulation!);Puma is an international conglomerate with a petroleum unit competing in an auction to win the right to drill for crude oil on a piece of land in one year. One can assume that the current market price of crude oil (per barrel) is $60 and that the land contains 400,000 barrels of oil. The oil would cost $45 million to extract if found. U.S. Treasury bills that mature in one year yield a continuously compounded interest rate of 3 %. The standard deviation of the returns on the price of crude oil is 50 percent. What would be the maximum bid that Puma would be willing to make at the auction (using the Black-Scholes-Merton model).;If we were to suppose that the available oil reserve follows a lognormal distribution with a mean of 400,000 barrels and standard deviation of 80,000 barrels. The extraction cost also follows a lognormal distribution with a mean of $45 million and standard deviation of $10 million. What is, on average, the maximum bid that the company would be willing to make? Use the Black-Scholes-Merton model. Need to show Monte Carlo simulation results.

 

Paper#49962 | Written in 18-Jul-2015

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