Question
You own a lot in Key West, Florida, that is currently unused. Similar lots have recently sold for $1,390,000. Over the past five years, the
You own a lot in Key West, Florida, that is currently unused. Similar lots have recently sold for $1,390,000. Over the past five years, the price of land in the area has increased 5 percent per year, with an annual standard deviation of 26 percent. You have approached a buyer and would like the option to sell the land in 12 months for $1,540,000. The risk-free rate of interest is 3 percent per year, compounded continuously.
What is the price of the put option necessary to guarantee your sales price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Price of put option $
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