A driver entering into a car lease agreement can obtain the right to buy the car in four 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

where /x = —0.25, a = 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%.

Transcribed Image Text:

ds = s dt + S dz