Question

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 much should you charge for the option?

		$37,980.48
		$36,845.72
		$35,199.13
		$34,462.88
		$33,071.15

Answer 1

Call option value:

Answer: $37,980.48

Formulas: