Piece of land in prime location that is currently unused

Assignment Help Financial Management

Reference no: EM132053412

Ignore transaction costs and other imperfections for the problem

a. You own a piece of land in a prime location that is currently unused. Similar lots have recently sold for $3 million. Over the past five years, the price of land in the area has increased by 10 percent per year, with an annual standard deviation of 20 percent. A potential buyer has recently approached you and wants an option to buy the land in the next 6 months for $3.2 million. The risk-free rate of interest is 5 percent per year, compounded continuously. Use the Black-Scholes option pricing model to determine how much you should charge for the option.

b. Suppose instead that you wanted the option to sell the land to the potential buyer in 6 months. Assuming all the facts are the same, what should be the price of the option today?

Reference no: EM132053412

Questions Cloud

Contrast the two duties and in examining the two duties : Define and contrast the two duties and in examining the two duties, why does the class think that these duties continue to be violated by the officers

Encourage punctuality in attending staff meetings : What can I do to encourage punctuality in attending your staff meetings?

What are the merits of the two methods : What are the merits of the two methods? approach should be used?

How the results of your statistical testing might be used : Discuss how the results of your statistical testing might be used as a foundation for organizational improvements.

Piece of land in prime location that is currently unused : You own a piece of land in a prime location that is currently unused. Similar lots have recently sold for $3 million.

Determine the modified durations of the two bonds : Determine the modified durations of the two bonds. which bond has a greater interest rate risk? Explain.

The steps of the corporate valuation model : Explain in your own words the steps of the corporate valuation model.

What type of hypothesis you have defined : Develop a research question and hypothesis around a health informatics topic from your reading or group discussion. Be sure your question shows clarity.

Compute the sales price variance : Comp Wiz sells computers. During May 2015, it sold 500 computers at a $900 average price each. Compute the sales price variance

User Account

All Pages