Question

You own a lot in Key West, Florida, that is currently unused. Similar lots have recently sold for $1,230,000 million. Over the past five years, the price of land in the area has increased 5 percent per year, with an annual standard deviation of 34 percent. You would like an option to sell the land in the next 12 months for $1,380,000. The risk-free rate of interest is 5 percent per year, compounded continuously.

What is the price of the put option necessary to guarantee your sales price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Price of put option $

Answer 1