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A retail business leases its store for 10000 per month. The lease runs for 10 years. Revenues for the business may be 30000 per month

A retail business leases its store for 10000 per month. The lease runs for 10 years. Revenues for the business may be 30000 per month or 15000 per month, with riskneutral probabilities of 50% for each possibility. Expenses other than rent are 8000 per month. The level of revenues per month will be known after 2 years. The annual effective risk-free interest rate is 4%. The risks of the business are all idiosyncratic.

Calculate the value of an option to terminate the lease after 2 years.

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