Question: You own a lot in Key West Florida that is
You own a lot in Key West, Florida, that is currently unused. Similar lots have recently sold for $1.1 million. Over the past five years, the price of land in the area has increased 12 percent per year, with an annual standard deviation of 25 percent. A buyer has recently approached you and wants an option to buy the land in the next 12 months for $1.25 million. The risk-free rate of interest is 5 percent per year, compounded continuously. How much should you charge for the option?
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