5 Real options Aa Aa Carlos and Beth are going to see a play

5. Real options Aa Aa Carlos and Beth are going to see a play this weekend and want to buy tickets before they sell out. They want to go the same night that their friends are going, but they haven\'t been able to reach them to find out whether they have tickets for Friday or Saturday night. If they purchase tickets for the same night that their friends did, they will get a utility of 15. If they choose the wrong night and end up going without their friends, they will only get a utility of 5 The numbers in the following table reflect the utility Carlos and Beth get under each of the described outcomes Day Friends See Play Saturday Options (1) Buy Friday tickets (2) Buy Saturday tickets Friday 15 5 15 If the probability that their friends have tickets for Saturday night is 50%, then the expected value of utility from buying tickets for Friday is , and the expected value of utility from buying tickets for Saturday is Now, suppose Carlos and Beth consider a third option: pay nominal fee for a Friday night ticket that can be converted into a Saturday ticket. If Carlos and Beth can choose to buy tickets for Friday night, knowing they have the option to convert their ticket date, they now will get a utility of 15, regardless of whether their friends have tickets for Friday or Saturday night, since they have the option to convert the date of their ticket The value of utility from buying tickets for Friday (with the option to convert to changing their ticket date) is therefore, the value of the real option is Suppose, instead, that if they end up going alone Friday night, it won\'t actually bother them much. That is, they will get a utility of 10 (rather than 5) if their friends have tickets for Saturday night and they bought nonconvertible tickets for Friday. This real option to convert their ticket date the variability of their outcomes and, thus, the value of the

Solution

Expected Value of Utility in Frist case = 0.5(5)+0.5(15)=10 for buying tickets for Friday

Expected Value of Utility in second case= 0.5(15)+0.5(5)=10 for buying tickets for Saturday.

To maintain the vaule of expected utlitiy to be equal to 10 the value of real option should be 5 for an example if thet buy ticket for Friday and Friends going on saturday they can convert Friday ticket to Saturday ticket by paying 5 therefore effective utlitiy is 15-5=10 similarly if both tickets for same day then effective utility is 15-5=10