-You are trying to negotiate an option to buy some land in Northeast Texas. Currently the land is worth $5 million and you want to lock in a price of $6.05 million two year hence when you will be ready to develop the land for residential use if you decide to proceed with the project. Based upon the last 20 years of real estate prices, you figure that the land value could go up at much as 15% per annum or down as much as 5% per annum. Assume a Treasury rate of 4.5% and a flat term structure of interest rates.

-You want to sell some land some land in Northeast Texas. Currently the land is worth $5 million and you want to lock in a price of $6.05 million two year hence when you will be ready to sell the land. Based upon the last 20 years of real estate prices, you figure that the land value could go up at much as 15% per annum or down as much as 5% per annum. Assume a Treasury rate of 4.5% and a flat term structure of interest rates.

hint - Use the binomial option pricing model to determine what you should pay the current owners for this option.