OPTION WORKSHEET: NATURAL RESOURCE OPTIONS

VALUING A NATURAL RESOURCE OPTION

This spreadsheet calculates the value of a natural resource option.
Assumptions
1. All the assumptions underlying the Black-Scholes model apply
2. The estimated reserves of the natural resource are known.

The user has to input the following variables

1. Present value of estimated reserves, net of royalties and marginal costs.
2. Variance in the price of the natural resource.
3. Present value of the cost of developing the natural resource.
4. Riskless interest rate that corresponds to relinquishment period.
5. Length of the relinquishment period on resource reserves.
6. Expected annual after-tax cashflow from resource after it is developed.

Inputs relating the underlying asset

Enter the estimated reserves of the natural resource = 100000 (in units)
Enter the current price of the natural resource, per unit = $22.50 (in currency)
 OPTION WORKSHEET: NATURAL RESOURCE OPTIONS

Enter the marginal cost per unit of extracting the natural resource =$10.00 (In currency)

Enter the standard deviation in the price of the natural resource (ln)30.00%
= (in %)

Enter the estimated annual after-tax cashflow after developing resource

$50,000
= (in currency)

Inputs relating to the option

Enter the present value of the cost of developing the resource option
$1,000,000
= (in currency)

Enter when the rights to resource will be relinquished =

10 (in years)
General Inputs
Enter the riskless rate that corresponds to the option lifetime = 8.00% (in %)

VALUING A LONG TERM OPTION/WARRANT

Stock Price= $1,250,000 T.Bond rate= 8.00%
Strike Price= $1,000,000 Variance= 0.09
Expiration (in years) = 10 Annualized dividend yield= 4.00%
 OPTION WORKSHEET: NATURAL RESOURCE OPTIONS

d1 = 1.13
N(d1) = 0.87

d2 = 0.18
N(d2) = 0.57

Value of the natural resource option = $472,622