Question

You own a lot in Key West, Florida, that is currently unused. Similar lots have recently sold for $1,200,000. Over the past five years, the price of land in the area has increased 6 percent per year, with an annual standard deviation of 31 percent. A buyer has recently approached you and wants an option to buy the land in the next 12 months for $1,350,000. The risk-free rate of interest is 4 percent per year, compounded continuously. |

How much should you charge for the option? |

Call price | $ |

Answer #1

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You own a lot in Key West, Florida, that is currently unused.
Similar lots have recently sold for $1,210,000. Over the past five
years, the price of land in the area has increased 5 percent per
year, with an annual standard deviation of 32 percent. A buyer has
recently approached you and wants an option to buy the land in the
next 12 months for $1,360,000. The risk-free rate of interest is 3
percent per year, compounded continuously. How much...

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Problem 17-10 Black-Scholes and Asset Value
You own a lot in Key West, Florida, that is currently unused.
Similar lots have recently sold for $1,260,000. Over the past five
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