You are in discussions to purchase an option on an office building with a strike price of
Question:
You are in discussions to purchase an option on an office building with a strike price of £47 million. The building is currently valued at £45 million. The option will allow you to purchase the building either 6 months from today or 1 year from today. Six months from today, accrued rent payments from the building in the amount of £500,000 will be made to the owners. If you exercise the option in 6 months, you will receive the accrued rent payments; otherwise the payment will be made to the current owners. A second accrued rent payment of £500,000 will be paid 1 year from today with the same payment terms. The standard deviation of the value of the building is 25 per cent, and the risk-free rate is an 8 per cent annual percentage rate. What is the price of the option today using 6-month steps?
Step by Step Answer:
Corporate Finance
ISBN: 9780077173630
3rd Edition
Authors: David Hillier, Stephen A. Ross, Randolph W. Westerfield, Bradford D. Jordan, Jeffrey F. Jaffe