Reference no: EM131037734

Suppose there is an options market in S02 permits, where each permit entitles one ton of S02 emissions. Suppose that running a scrubber costs $65 per year per ton of S02 removed, has a capital cost of $30,000,000, and an expected life of five years. Then a utility that needs to remove 40,000 tons of S02 per year should install the scrubber if:

(a) The sum of the costs of 40,000 one, two, three, four, and five year call options each with a strike price of $65 is less than $30,000,000.

(b) The sum of the costs of 40,000 one, two, three, four, and five year call options each with a strike price of $65 is more than $30,000,000.

(c) The sum of the costs of 40,000 one, two, three, four, and five year put options each with a strike price of $65 is less than $30,000,000.

(d) The sum of the costs of 40,000 one, two, three, four, and five year put options each with a strike price of $65 is more than $30,000,000.