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