Black—Scholes and Asset Value Coal mining is becoming more popular because of the demand for energy in Asia. Assume that you have the rights to a coal mine and the most recent valuation of the mine was £6.7 million. Because of increasing demand from Asia, the price of similar mines has grown by 15 per cent per annum, with an annual standard deviation of 20 per cent.

A buyer has recently approached you and wants an option to buy the mine in the next 12 months for £7 million. The risk-free rate of interest is 3 per cent per year, compounded continuously. How much should you charge for the option?