3. Expansion options (S23.1) You own a one-year call option to buy 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 spreadsheet for Chapter 22, which calculates Black–Scholes values (see the Beyond the Page feature).