Final Review

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Final Review
2
Announcements

• Final will be a two hour test, 730-930 Wed.
• The final is cumulative.
• Expect 6-8 questions (depending on difficulty)
• I will hold office hours as scheduled today and
  Tuesday, and have 1-2 extra hours (see website)
• HW 4 solutions will be posted later today
• Three sample midterms will be on lineone will
  by mine from last quarter.

3
Quick Review of 13, 15 and 22

• Efficient Markets
• Weak (past prices)
• Semi-Strong (all public info)
• Strong (all possible information)
• Evidence?
• MM Propositions

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Review Cont.

• Ch. 22
• Graphs and definitions
• Put-Call parityin terms of prices,
• Call PV Bond Put Stock
• Pricing a call option
• Build a portfolio consisting of fractional stocks
  plus borrowing that has the same payoff as the
  option in the two states given. The fraction is
  given by the ratio of the swing in the option to
  the swing of the stock price. The call option is
  then worth the total investment of the combined
  portfolio.

5
Review of Ch. 8.

• Decision trees

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Ch. 8 continued

• Valuing Real Options
• Calculate the NPV of the project without the
  option.
• Calculate the NPV of the project with the option
  (using the decision tree, and making optimal
  decisions)
• Subtract the NPVs.

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Option to Abandon Example

• Consider starting a mine the company has already
  performed a survey (sunk cost--not a cash flow
  remember!) and found a site that contains gold.
• The costs per year for recovering the gold are 1
  million. The amount of gold is unknown. It is
  equally likely that revenues from the sale of the
  gold will be 0.25, 1.0 or 1.5 million.
• What is the value of the option to abandon?

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