Question

Hi. I am trying to value an undeveloped patent using black and scholes. However, I am not sure that I understand the formula well. if the cost of delay =1/the remaining life of the patent this means that always Stock price x exponential (-cost of delay x life of the patent) will yield Stock price x exponential (-1) withput any need to compute the cost of delay. Is this true? it seems weird though :). I am wondering why cost of delay is not constant 1/initial life of the patent as it makes more sense than having exponential (-1) always.

Answer 1

Because the cost of delay will increase as you go through time.. with fewer years left on the patent, you have more to lose.