The 1-year interest rates in Norway, ????, is equal to 3%; - The 1-year interest rates in the US, ??? is equal to 1%; - Spot exchange rate is equal to ? ( ??? ???) = ??? ??? 8; - The 1-year forward rate is ? ( ??? ???) = ??? ??? 8

Finance Dec 05, 2020

The 1-year interest rates in Norway, ????, is equal to 3%; - The 1-year interest rates in the US, ??? is equal to 1%; - Spot exchange rate is equal to ? ( ??? ???) = ??? ??? 8; - The 1-year forward rate is ? ( ??? ???) = ??? ??? 8.5

Compute the forward premium in percentage points. Is the NOK trading at a premium or at a discount?

Expert Solution

1).

False

Decision tree is used in valuing real options as well. Real options such as abandonment and expansion options makes good use of decision tree analysis.

2).

Expansion options are the type of real options which allows a project to be expanded if demand turns out to be greater than expected. Among the given options, Growth option is closer.

3).

The firm wants to check if the demand is strong and then increase its investment accordingly. This decsribes the real option to Expand.

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