bidding for antamina Essay
1. In what way is the development of a copper mine like Antamina a real option? In what way is the bidding structure put in place by the Peruvian government an option?
The mine had a valuable real option component, in the form of the right to develop the mine after completing exploration. The Peruvian government requested the bidders to state both the premium that they would pay and exercise price (development expenditure) they would set for this real option.
What is the correspondence between these real options and financial options?
Theoretically real options and financial options are very similar, however real options are usually solved through numerical methods (ex …show more content…
Apart from the obvious sources of uncertainty, the model works with a set of defined outcome probabilities for the high, expected and low scenarios. These are based on “expert” opinion, meaning that the results could be biased.
The model assumes no uncertainty from prices after year two, which is not totally accurate; companies do no usually hedge to 100%, especially when volumes are so high.
3. Using the spreadsheet, bid.xls, calculate values for the project, and then submit a bid representing how much you will pay for the property. You may work in teams, but identify the members of your team when submitting your bid. You will submit three different bids, each one under a different set of auction procedures:
• If the winning bidder was legally forced to develop Antamina after completing the exploration phase, and was required to pay the Peruvian government up- front for this project, what is the most they would be willing to pay?
The should pay only the initial investment of $17.50
• If the winning bidder could choose to whether or not to develop Antamina at the end of two years, but was required to pay the Peruvian government a single fee up-front for the right to develop the project, what is the most they would be willing to pay? Under this alternative, there is no investment commitment or penalty;