How much should you charge for the option

Assignment Help Financial Management

Reference no: EM131050271

You own a lot in Key West, Florida, that is currently unused. Similar lots have recently sold for $1,270,000 million. Over the past five years, the price of land in the area has increased 7 percent per year, with an annual standard deviation of 36 percent. A buyer has recently approached you and wants an option to buy the land in the next 12 months for $1,420,000 million. The risk-free rate of interest is 5 percent per year, compounded continuously.

How much should you charge for the option?

Reference no: EM131050271

Questions Cloud

Calculate the equilibrium point for company return for each : Roberts AB is trying to determine the best way to finance a proposed investment of 10 million. There are two options. Plan 1 means that the investment is entirely financed with long-term bonds with 9% interest rate. Calculate the equilibrium point fo..

Questiones about time value of money : One of the largest individual, industry-based superannuation funds is UniSuper Ltd, which services and manages superannuation for employees in the tertiary education sector in Australia, including universities, TAFE colleges and other higher educa..

During the 2005 major league baseball season : During the 2005 Major League Baseball season, Derrek Lee had a 0.335 batting average. Construct a binomial probability distribution for the number of successes (hits) for four official at bats during this season.

What is a marketability risk premium : What is a marketability risk premium? Why is it important to adjust projected cash flows for this risk? How might the size of a firm affect its level of risk? Be specific. Does beta in the capital asset pricing model have meaning for a firm that is n..

How much should you charge for the option : You own a lot in Key West, Florida, that is currently unused. Similar lots have recently sold for $1,270,000 million. Over the past five years, the price of land in the area has increased 7 percent per year, with an annual standard deviation of 36 pe..

Financial institutions to hedge can decrease risk : The use of financial derivatives by financial institutions to hedge can decrease risk. However, they can also increase risk. Which of the following examples illustrates this?

The price of put option with the same exercise price : A stock is currently selling for $72 per share. A call option with an exercise price of $75 sells for $3.60 and expires in three months. If the risk-free rate of interest is 3.2 percent per year, compounded continuously, what is the price of a put op..

What single or quoted rate : Bank A pays 8 % interest compounded quarterly on your money market account . B bank managers want the tax on this money market account is equal to the effective annual rate of bank A, but interest will be compounded monthly. What single or quoted ..

Affected if outside debt financing is used instead of equity : Mike Bloom has just received a golden handshake of $5 million from his former partners. His plan is to use the money to start a new financial information service, and he is willing to invest all of the money, if necessary. His goal is to realize an a..

User Account

All Pages