INTERNATIONAL FINANCIAL MANAGEMENT

International Financial Management



International Financial Management

A) GoodPharma PLC

Black Scholes-Merton Model

Options are financial instruments that give the holders the right to buy or sell underlying stocks or matter at a future point in time at an agreed price. The Black Scholes Models is a tool for pricing equity options. Before this, there was no way to price standard options in a very real sense. This model was developed in 1973 which is another way a mathematical model describing the behaviour of market prices of financial instruments in time (Hull, John C. 2000, pp. 231).

The Black-Scholes formula assumes that the returns of the underlying asset are Gaussian, or equivalently that the asset value follows a diffusion (In common parlance, the term refers to scattering a notion of distribution of making available (distribution of a product, information), even "spray" (diffuser) geometric Brownian. The first four are obvious data, only the volatility asset is difficult to assess. Two analysts will have an opinion different (In mathematics, is defined differently in algebraic number theory to measure the possible lack of duality) on the value of to choose.

One can also apply the formula to the inverse (In mathematics, the inverse of an element x of a set with an internal composition law written multiplicatively, is an element y such that x · y = y · x = 1, 1 denotes if). Given the price of the option is listed in the markets, which value of must be chosen so that the BS formula gives exactly that price. This gives the "implied volatility" that has a great practical and theoretical (Hull, John C., 2000, pp. 23).

GoodPharma Patent valuation through Black Scholes-Merton Model

Patent Granted

20 years

Development cost

1.5 Billion Pounds

Present Value

1 Billion Pounds

Expected Variance

0.03 17.32%

Riskless bond 20 years

10%

Assumptions

All the assumption of Black Scholes-Merton Model apply

The project present value & value of variance known

Input in the formula

Present value of the cash inflows taking for project

Function of technical and environmental change has been taken as Present Value of Variance

Current Value of developing project cost commercial utilization

Risk-less Rate of interest which match up with product patent length

Length of the product patent to project

After the development, the expected cash-flow from the project

PROJECT INPUT

Present Value of cash flow of the project

1000000000

Project Standard Deviation

17.32%

OPTION DERIVATIVE INPUT

Cost of Developing project

1500000000

Tenure of the patent project

20

 

GENERAL INPUTS

Riskless 20 years bond rate

10.00%

VALUATION FOR LONG-TERM OPTION

Price of Stock

1000000000

Price of Strike

1500000000

Expiration (in years)

20

Bond interest rate

10.00%

Variance

0.030

Annual dividend yield

5.00%

d1 =

1.15484

N(d1) =

0.87592

d2 =

0.38024

N(d2) =

0.64812

Value of the product patent/project right =

 

 

 

190,663,942

Comments on the Results

It is common that an inventor wishes, for various reasons; estimate the value of the patent it holds. Indeed, patents are an intangible capital of the company. They may be subject to license, implying that the price of the object; in this case the patent is determined (Munari F., 2011, pp. 160). Patents are an asset to company, just as a building. In addition, they allow the company to innovate in the competitive ...