Question
the binomial option valuation method and risk-neutral valuation(Variables in formulas and labels on figure axes should be clearly defined.) You have the possibility to purchase
the binomial option valuation method and risk-neutral valuation(Variables in formulas and labels on figure axes should be clearly defined.)
You have the possibility to purchase a piece of land that can be developed with an office building. The asking price for the land is 40 000 000 SEK. Assume that it takes no time to develop the property and that the property, if developed today, would have a market value of 240 000 000 SEK after development. The market value of properties developed for office use is expected to increase 1% per year in perpetuity and the volatility of the market value is 30% per year. The required rate of return on office buildings in this location is 6.0% per year. The risk-free rate of return is 4.0% per year.
The development cost is 260 000 000 SEK and it is expected to stay at that amount in the foreseeable future. According to local building regulations, the land must be developed within three years. Otherwise, the building permit expires and the land becomes worthless.
Use the binomial option valuation method and risk-neutral valuation to determine if it is profitable to purchase the land for 40 000 000 SEK. The length of each period in the binomial tree should be one year.
potin and Calculate the up and down movements of the underlying asset using the formulas e ovo, i.e. use the formulas that you used in the option valuation project. potin and Calculate the up and down movements of the underlying asset using the formulas e ovo, i.e. use the formulas that you used in the option valuation project
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