Questions: Boeing plans to give American Airlines (AA) an option to buy wide-body 9 W9 aircraft at the end of three years for 200 million, and the price of 9 W 9 aircraft today is 180 million. The life of the aircraft is 20 years. Boeing's business consists of 50% in commercial aircraft and 50% in defense projects. The volatility for Boeing stock is 3% per month. Airbus is 100% in the commercial aircraft business. The volatility for Airbus stock is 5% per month. The 3-year risk-free rate is 3% per year, and the twenty-year rate is 5% per year. What is the time to maturity (Years) of the option? 5 10 3 20

Boeing plans to give American Airlines (AA) an option to buy wide-body 9 W9 aircraft at the end of three years for 200 million, and the price of 9 W 9 aircraft today is 180 million. The life of the aircraft is 20 years. Boeing's business consists of 50% in commercial aircraft and 50% in defense projects. The volatility for Boeing stock is 3% per month. Airbus is 100% in the commercial aircraft business. The volatility for Airbus stock is 5% per month. The 3-year risk-free rate is 3% per year, and the twenty-year rate is 5% per year.

What is the time to maturity (Years) of the option?
5
10
3
20

Transcript text: Boeing plans to give American Airlines (AA) an option to buy wide-body 9 W9 aircraft at the end of three years for $\$ 200$ million, and the price of 9 W 9 aircraft today is $\$ 180$ million. The life of the aircraft is 20 years. Boeing's business consists of $50 \%$ in commercial aircraft and $50 \%$ in defense projects. The volatility for Boeing stock is $3 \%$ per month. Airbus is $100 \%$ in the commercial aircraft business. The volatility for Airbus stock is 5\% per month. The 3-year risk-free rate is 3\% per year, and the twenty-year rate is $5 \%$ per year. What is the time to maturity (Years) of the option? 5 10 3 20

Solution

Solution Steps

To determine the time to maturity of the option, we need to identify the period after which the option can be exercised. The problem states that the option to buy the aircraft is at the end of three years. Therefore, the time to maturity of the option is 3 years.

Step 1: Identify the Time to Maturity

The problem states that American Airlines has an option to buy the aircraft at the end of three years. Therefore, the time to maturity of the option is the period from now until the option can be exercised, which is 3 years.

Final Answer

The time to maturity of the option is $\boxed{3}$ years.

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