Option and Sequel
You will find an Excel file with exhibits from the case on Moodle. Assignments MUST be submitted before class on Moodle. In class, you will have 10 minutes to present your solution, followed by a class discussion. You may want to prepare slides (max. 7) to support your presentation.
“ARUNDEL PARTNERS: THE SEQUEL PROJECT” State clearly all assumptions that you make and defend their choices whenever possible. 1. Why do the principals of Arundel Partners think they can make money buying movie sequel rights? Do you expect any major film studios to be interested in the sort of arrangement described in the case? Why do the partners want to buy a portfolio of sequel rights all at once rather than negotiating film-by-film to buy each? 2. How should one translate the data in this case to structure the valuation of sequel options to tailor it for the Black-Scholes approach, to valuing Call options on a Stock with a traded market value process? In particular, what numbers should be assigned to: • • • • The “primitive asset value” underlying sequel value (on average), for a “representative” (scale adjusted) film; The exercise price for a sequel option to be executed; The relevant time horizon (maturity) of sequel options; The variance rate of the underlying asset values/returns to use for calculating the relevant Black and Scholes Call option value, of the option to produce a sequel film?
In light of the assumptions made regarding the above, how much should be paid for the rights to produce the sequel for an average-scale original production? How do the computed Black-Scholes formula-based Sequel Option Values compare with more naïve valuations, based on either (i) exercising ALL sequel options, or (ii) making sequels ONLY for those films in the sample which resulted in sufficient profitability of the first? You may use a risk-adjusted discount rate of 12% which applies to the relevant cash flows in the case, and a risk-free rate of 6%. 3. What are the primary advantages
“ARUNDEL PARTNERS: THE SEQUEL PROJECT” State clearly all assumptions that you make and defend their choices whenever possible. 1. Why do the principals of Arundel Partners think they can make money buying movie sequel rights? Do you expect any major film studios to be interested in the sort of arrangement described in the case? Why do the partners want to buy a portfolio of sequel rights all at once rather than negotiating film-by-film to buy each? 2. How should one translate the data in this case to structure the valuation of sequel options to tailor it for the Black-Scholes approach, to valuing Call options on a Stock with a traded market value process? In particular, what numbers should be assigned to: • • • • The “primitive asset value” underlying sequel value (on average), for a “representative” (scale adjusted) film; The exercise price for a sequel option to be executed; The relevant time horizon (maturity) of sequel options; The variance rate of the underlying asset values/returns to use for calculating the relevant Black and Scholes Call option value, of the option to produce a sequel film?
In light of the assumptions made regarding the above, how much should be paid for the rights to produce the sequel for an average-scale original production? How do the computed Black-Scholes formula-based Sequel Option Values compare with more naïve valuations, based on either (i) exercising ALL sequel options, or (ii) making sequels ONLY for those films in the sample which resulted in sufficient profitability of the first? You may use a risk-adjusted discount rate of 12% which applies to the relevant cash flows in the case, and a risk-free rate of 6%. 3. What are the primary advantages