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You own a lot in Key West, Florida, that is currently unused. Similar lots have recently...

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Finance

You own a lot in Key West, Florida, that is currently unused.Similar lots have recently sold for $1,280,000. Over the past fiveyears, the price of land in the area has increased 6 percent peryear, with an annual standard deviation of 35 percent. A buyer hasrecently approached you and wants an option to buy the land in thenext 12 months for $1,430,000. The risk-free rate of interest is 4percent per year, compounded continuously.

How much should you charge for the option? (Do not roundintermediate calculations and round your answer to 2 decimalplaces, e.g., 32.16.)

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Transcribed Image Text

You own a lot in Key West, Florida, that is currently unused.Similar lots have recently sold for $1,280,000. Over the past fiveyears, the price of land in the area has increased 6 percent peryear, with an annual standard deviation of 35 percent. A buyer hasrecently approached you and wants an option to buy the land in thenext 12 months for $1,430,000. The risk-free rate of interest is 4percent per year, compounded continuously.How much should you charge for the option? (Do not roundintermediate calculations and round your answer to 2 decimalplaces, e.g., 32.16.)

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