AFE 7507 Derivative Pricing and Valuation.

Assignment

Students are required to answer BOTH of the following two questions:

Question 1. Explain the key characteristics of the real option approach to valuing a project opportunity and critically discuss the strengths and weaknesses of adopting this approach.

Question 2. Based on the following case study "Mafutec", critically evaluate the adopted real option approach to valuing the oil project opportunity in Ruvuma by discussing the suitability of the approach, the analysis, and its strengths and weaknesses. Interpret its results including any simulations you may wish to make, and provide a justified recommendation to the Mafutec management on the maximum bid for the oil lease.