You own a one-year call option on one acre of Los Angeles real estate. The exercise price is

$2 million, and the current, appraised market value of the land is $1.7 million. The land is currently used as a parking lot, generating just enough money to cover real estate taxes. The annual standard deviation is 15% and the interest rate 12%. How much is your call worth?

Use the Black–Scholes formula. You may find it helpful to go to the “live” spreadsheet for Chapter 21, which calculates Black-Scholes values (visit this book’s Web site, www.mhhe.

com/bma ).

AppendixLO1