You own a lot in Key West, Florida, that is currently unused. The going price for similar lots is currently $1.2 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 19 percent. A buyer has recently approached you and wants an option to buy the land in the next 9 months for $1,310,000. The risk-free rate of interest is 7 percent per year, compounded continuously. How much should you charge for the option? Round off your answer to the nearest ‘000 dollars and show detailed calculations for each computational step.
You own a lot in Key West, Florida, that is currently unused. The going price for similar lots is currently $1.2 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 19 percent. A buyer has recently approached you and wants an option to buy the land in the next 9 months for $1,310,000. The risk-free rate of interest is 7 percent per year, compounded continuously. How much should you charge for the option? Round off your answer to the nearest ‘000 dollars and show detailed calculations for each computational step.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
You own a lot in Key West, Florida, that is currently unused. The going
price for similar lots is currently $1.2 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 19 percent. A buyer has recently approached you
and wants an option to buy the land in the next 9 months for $1,310,000. The
risk-free rate of interest is 7 percent per year, compounded continuously.
How much should you charge for the option? Round off your answer to the
nearest ‘000 dollars and show detailed calculations for each computational
step.
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