Question

You own a lot in Orlando, Florida that is currently unused. Similar lots have recently sold for $1 million. Over the past five years, the price of land in the area has increased 6 percent per year, with an annual standard deviation of 10 percent. A buyer has recently approached you and wants an option to buy the land in the next 12 months for $1.05 million. The risk-free rate of interest is 3.5 percent per year, compounded continuously. How much should you charge for the option?

		$25,979.83
		$28,447.64
		$31,925.58
		$33,592.51
		$35,708.20

Answer 1