State the generalised law of one price, Finance Basics


a) An oil well now produces 75000 barrels per year. The well will produce for 21 years more, but production will decline by 3.7% per year. Oil prices however, will increase by 2.5% per year. What is today's price of 1 barrel of oil if the present value of the well's production is $50 M? The discount rate is 9.7% compounded continuously.

b) State the generalised law of one price.

c) Show that an option on an index will never be more expensive than the cost of a corresponding collection of options on the individual securities.

Posted Date: 11/15/2013 12:52:25 AM | Location : United States

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