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To: tyc:> who wrote (105137)	5/28/2001 1:02:27 AM
From: Mark Adams	Read Replies (1) \| Respond to of 436258

My take on it; Risk free interest rate does apply to options pricing for the time value premium- but often is swamped by volatility. I'd take DAKs suggestion and treat it as an Interest problem. ie, calculate the Net Present Value of (Current Price of Gold - $220) received 4 years hence. This might be low. Idea being if you owned the right to one ounce of gold 4 years from now, you could sell the ounce at todays price and cover in the future. In the mean time, you invest the short proceeds in 'risk free' t-bills. This would be a slightly different calc, in that you get the premium plus the discounted interest flow for the four years. Still just a variation on NPV. Even this might just be a floor valuation. If you consider the possibility that gold may increase during the 4 years, and decide against hedging to 'lock in' a 'risk free' return, then you might have to add in the volatility component, likely using the Black-Scholes model. As LTCM proved, even good models might err in pricing unlikely events, such as 00 on the ol roulette wheel. So in the end, you have just a set of approximations based on expectations.

To: tyc:> who wrote (105137)	5/28/2001 11:56:06 AM
From: LLCF	Read Replies (1) \| Respond to of 436258

<There is a concept in the mining industry described as "the option value of a mine">. <What I am really trying to determine is whether an interest rate factor should be reckoned into the option value. Or should we just figure in the price volatility of the commodity ? Hence my interest in the arbitrage involved.> Yep, I'd use the cost of production for the strike and yes you must take interest rates into account as does the Black Scholes option pricing model... you can find it at CBOE.com... I'd put zero dividends in the model and use the 4 year spot interest rate but there are arguments to use shorter rates. DAK