A driver entering into a car lease agreement can obtain the right to buy the car in 4 years for $10,000. The current value of the car is $30,000. The value of the car, S, is expected to follow the process ds=S dt +S dz where = -0.25, = 0.15, and dz is a Wiener process. The market price of risk for the car price is estimated to be -0.1. What is the value of the option? Assume that the risk- free rate for all maturities is 6%.

AppendixLO1