Question

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 years, the price of land in the area has increased 8 percent per year, with an annual standard deviation of 37 percent. A buyer has recently approached you and wants an option to buy the land in the next 12 months for $1,410,000. The risk-free rate of interest is 4 percent per year, compounded continuously. How much should you charge for the option? (Enter your answer in dollars, not millions of dollars (e.g., 1,234,567). Do not round intermediate calculations and round your answer to 2 decimal places (e.g., 32.16).)

Call price $

Answer #1

You own a lot in Key West, Florida, that is currently unused.
Similar lots have recently sold for $1,370,000 million. Over the
past five years, the price of land in the area has increased 5
percent per year, with an annual standard deviation of 28 percent.
A buyer has recently approached you and wants an option to buy the
land in the next 12 months for $1,520,000 million. The risk-free
rate of interest is 3 percent per year, compounded
continuously....

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...

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...

You own a lot in Key West, Florida, that is currently unused.
Similar lots have recently sold for $1,330,000. Over the past five
years, the price of land in the area has increased 7 percent per
year, with an annual standard deviation of 33 percent. A buyer has
recently approached you and wants an option to buy the land in the
next 12 months for $1,480,000. The risk-free rate of interest is 3
percent per year, compounded continuously. How much...

You own a lot in Key West, Florida, that is currently unused.
Similar lots have recently sold for $1,270,000 million. Over the
past five years, the price of land in the area has increased 7
percent per year, with an annual standard deviation of 36 percent.
You would like an option to sell the land in the next 12 months for
$1,420,000. The risk-free rate of interest is 5 percent per year,
compounded continuously. What is the price of the...

You own a lot in Orlando, Florida that is currently unused.
Similar lots have recently sold for $1 million. Over the past five
years, the price of land in the area has increased 6 percent per
year, with an annual standard deviation of 10 percent. A buyer has
recently approached you and wants an option to buy the land in the
next 12 months for $1.05 million. The risk-free rate of interest is
3.5 percent per year, compounded continuously. How...

You own a lot in Montreal that is currently unused. Similar lots
have recently sold for $2.6 million. Over the past five years, the
price of land in the area has increased 12 percent per year, with
an annual standard deviation of 15 percent. A buyer has recently
approached you and wants an option to buy the land in the next 12
months for $2.8 million. The risk-free rate of interest is 8
percent per year, compounded continuously. How much...

You own a lot in Bozeman, Montana that is currently unused.
Similar lots have recently sold for $1.7 million. Over the past
five years, the price of land in the area has increased 15 percent
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How much...

Ignore transaction costs and other imperfections for the
problem
a. You own a piece of land in a prime location that is currently
unused. Similar lots have recently sold for $3 million. Over the
past five years, the price of land in the area has increased by 10
percent per year, with an annual standard deviation of 20 percent.
A potential buyer has recently approached you and wants an option
to buy the land in the next 6 months for...

You own a lot in Lowell, Massachusetts that is currently unused.
Similar lots have recently sold for $1.28 million. Over the past
five years, the price of land in the area has increased 10 percent
per year, with an annual standard deviation of 10 percent. A buyer
has recently approached you and wants an option to buy the land in
the next 12 months for $1.35 million. The risk-free rate of
interest is 3 percent per year, compounded continuously. How...

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