1. 9.

Black–Scholes and asset value [LO 25.4] You own plot of land in Noosa, Queensland, that is currently unused. Similar plots have recently sold for $1 250 000. Over the past five years, the price of land in the area has increased 7 per cent per year, with an annual standard deviation of 30 per cent. A buyer has recently approached you and wants an option to buy the land in the next 12 months for $1 500 000.

The risk-free rate of interest is 5 per cent per year, compounded continuously. How much should you charge for the option?