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Strategies & Market Trends : John Pitera's Market Laboratory
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To: John Pitera who wrote (3946)6/2/2001 8:09:45 AM
From: tyc:>  Read Replies (2) of 33421
 
one bit of advice: If someone is trying to sell you a Goose that is supposed to start laying 1 oz golden eggs in 4 years... I'd look askance at that investment opportunity

Now that's funny! I should have replied in all seriousness;

-No! What he wants to do is sell me an option to buy for $220 the egg that the goose will lay four years from now. ($220 is the amount it costs him to keep the goose for a year).

The goose does exist now and is laying one egg each year. The current market price of an egg is $265.

What is a fair price to pay today for that option ?

Factors;

1. Todays price of gold

2. the volatility of the price of gold, (which affects directly the volatility of the value of the egg (FCF))

3. the "probability weighting" that each future price point commands. (Black scholes says probabilities shd be acc. to a lognormal distribution curve)

4 What else ? Should we take into account the size of the goose's ovaries ?

If we can figure out how much we should pay today for an option on each of the eggs the goose will lay in the future (Future FCF), haven't we figured out the present fair value of all future egg production ? Isn't that what the goose is worth ?

The "Option value of Mines" is not MY idea. Simply trying to understand what it means.
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