BFW3540 Modelling in Finance Case Study, MU, Singapore: On May 7, 2008, Chrysler, in the US, announced a deal called “Let’s Refuel America”

Let’s Refuel America On May 7, 2008, Chrysler, in the US, announced a deal called “Let’s Refuel America”, where the purchaser of certain new models of vehicles would receive a card that allows the holder to purchase a gasoline or diesel fuel that locks in the price at $2.99 a gallon for three years with 12,000 miles of driving a year. Please read the “Chrysler Deal.PDF” files for more information.

(a) Estimate the value of this Deal to the potential buyer for the following two models:
Dodge Caliber: 24 MPG
Dodge Ram: 15 MPG
So, the buyers of Dodge Caliber can purchase up to 500 gallons of gasoline at $2.99 per gallon per year, and the buyer of Dodge Ram can purchase up to 800 gallons at $2.99 per gallon per year for the next three years.1 Use as many different methods or models as your group can think of. Also, discuss the limitations and attractiveness of each of the methods or models you use. When valuing the Deal using the following information:

i. Assume that the spot gasoline price at the time of the Deal’s valuation is $3.613 per gallon.

ii. Assume that the risk-free interest rate is 1.55% compounded continuously.

iii. If you need the historical gasoline prices, use the “U.S. All Grades Conventional Retail Gasoline Prices” contained in the posted Excel file – use Sheet named “Data 1” column B.

(b) If you have to choose between this Deal and $1,550 rebate, which one would you choose for which model? The choice is either get the Deal that allows you to purchase 500 gallons (Dodge Caliber) or 800 gallons (Dodge Ram) at $2.99 per gallon per year for the next three years or you take a cash rebate of $1,550 instead of the Deal. The rebate will reduce the price by $1,550. Discuss the risk implication of taking the rebate.

Information attached or posted:

1. Description of the Deal as reported by USA TODAY (PDF filename: Chrysler
Deal.pdf).

2. Historical weekly gasoline price from EIA (Excel filename: “Weekly gasoline price.xls”) U.S. All Grades Conventional Retail Gasoline Prices (Cents per Gallon) given in Column B.

Please note the following about the Deal.

1. Each buyer of the two models under consideration will receive a card, a sample image of the card is given below:

This card will be used every time you exercise the option to purchase gaoline at $2.99 per gallon. The computer system will keep track of how many gallons of gasoline you have already purchased at $2.99 in a year, and, if this amount exceeds 500 gallons for Caliber or 800 for Ram, you cannot exercise the option because you would have exceeded the limit for the year. You need to wait for the next year if it is within the 3- year limit.

2. After three years, the card would expire