Question

You own a lot in Hartford, Connecticut that is currently unused. Similar lots have recently sold for $0.7 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 15 percent. A buyer has recently approached you and wants an option to buy the land in the next 12 months for $0.82 million. The risk-free rate of interest is 3 percent per year, compounded continuously. How much should you charge for the option?

$11,466.30 |
||

$12,184.46 |
||

$13,932.44 |
||

$14,375.62 |
||

$15,005.46 |

Answer #1

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