Question

You own a one-year European call option to buy one acre of Los Angeles real estate. The exercise price is $2.07 million, and the current, appraised market value of the land is $1.77 million. The land is currently used as a parking lot, generating just enough money to cover real estate taxes. The annual standard deviation is 16% and the interest rate is 14%.

How much is your call worth? Use the Black–Scholes formula. (Enter your answer in dollars not in millions, rounded to the nearest dollar. Do not round intermediate calculations.)

Answer 1

Proper solution is given.