The price of oil is $45 per barrel. The effective lease rate and risk free rate are 3.0% and 4.0%, respectively. The constant cost of extraction is $25 per barrel and the volatility of prices is 15.0%. If an untapped well costs $240 to open and can produce indefinitely, what is the value of the unopened well?

Question

Quizplus · Accepted Answer

The value of the unopened well can be calculated using the Black-Scholes option pricing model for perpetual options. The formula considers the current price of oil, the cost of extraction, the risk-free rate, the lease rate, and the volatility. After applying these parameters, the value of the well is closest to $635.

The Price of Oil Is $45 Per Barrel