How much would be willing to pay for the land insurance

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Reference no: EM132663794

You own a large plot of land outside of A. You had it recently appraised for $300k, but land prices are volatile. In particular, the land has a 50% chance of increasing by 30% and a 50% chance of decreasing by 10% in each of the next two years.

Problem 1: A local insurance company is offering you a "land insurance" contract. With land insurance, you would have the right (but not the obligation) to sell the land to the company for $377k in 2 years. The risk-free rate now (and in one year) is 4%. How much would you be willing to pay for this land insurance contract today?

Reference no: EM132663794

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