A commercial real estate company has an option to develop a parcel of land. Assuming the...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
A commercial real estate company has an option to develop a parcel of land. Assuming the dynamics of land value, L, are described by geometric Brownian motion with drift a and volatility o, and that the cost of developing the land is I, answer the following questions. Assume the economy is risk-neutral and the instantaneous risk-free rate of interest is r. a. Compute the value of the development option, F(L), and the optimal exercise policy, L, assuming the firm can exercise the option at any time. b. In a more realistic setting, the company may face competition that damages the value of its growth options. For simplicity, assume that the arrival of competition can be described as a Poisson process with intensity parameter 2; and that conditional on the arrival of competition, the development option becomes worthless (i.e., drops in value to zero). Compute the value of the option, F(L), and the optimal exercise policy, L, under this competition scenario. c. Compare the optimal exercise policies under parts a. and b. of this question. How does competition influence the optimal exercise policy? A commercial real estate company has an option to develop a parcel of land. Assuming the dynamics of land value, L, are described by geometric Brownian motion with drift a and volatility o, and that the cost of developing the land is I, answer the following questions. Assume the economy is risk-neutral and the instantaneous risk-free rate of interest is r. a. Compute the value of the development option, F(L), and the optimal exercise policy, L, assuming the firm can exercise the option at any time. b. In a more realistic setting, the company may face competition that damages the value of its growth options. For simplicity, assume that the arrival of competition can be described as a Poisson process with intensity parameter 2; and that conditional on the arrival of competition, the development option becomes worthless (i.e., drops in value to zero). Compute the value of the option, F(L), and the optimal exercise policy, L, under this competition scenario. c. Compare the optimal exercise policies under parts a. and b. of this question. How does competition influence the optimal exercise policy?
Expert Answer:
Answer rating: 100% (QA)
Actual property corporations are the onlyprevent destination for the solution to the trouble of no longer understanding how to create a dream house for yourself although like other sectors actual esta... View the full answer
Related Book For
Business Statistics a decision making approach
ISBN: 978-0133021844
9th edition
Authors: David F. Groebner, Patrick W. Shannon, Phillip C. Fry
Posted Date:
Students also viewed these finance questions
-
An electronics manufacturer has an option to produce six styles of cell phones. Each of these devices requires time, in minutes, on three types of electronic testing equipment, as shown in the table...
-
A stock price follows geometric Brownian motion with an expected return of 16% and a volatility of 35%. The current price is $38. a) What is the probability that a European call option on the stock...
-
Todd Lindsey & Associates, a commercial real estate company located in Boston, owns six office buildings in the Boston area that it leases to businesses. The lease price per square foot differs by...
-
In Exercises 7192, find and simplify the difference quotient f(x +h)-f(x) h -, h = 0
-
Regression analysis of free throws by 29 NBA teams during the 20022003 season revealed the fitted regression Y = 55.2 + .73X (R2 = .874, syx = 53.2), where Y = total free throws made and X = total...
-
A squirrel-cage induction motor runs at a full-load slip of 3.7 percent. The rotor current at starting is 6.0 times the rotor current at full load. The rotor resistance and inductance is independent...
-
What are the two ways a party may obtain a voluntary dismissal of an action?
-
The Kalo Fertilizer Company makes a fertilizer using two chemicals that provide nitrogen, phosphate, and potassium. A pound of ingredient 1 contributes 10 ounces of nitrogen and 6 ounces of...
-
Evaluate the actions that Bruce Hasenyager took to implement the Hi-Tech Environment (HTE) at Chemical Bank. Did he have the right approach within the CSD? How about within the organization as a...
-
During Year 1, Anthony Company purchased debt securities and holds the securities as available-for-sale. Pertinent data are as follows: Security Cost $20,000 TE 40,000 90,000 $150,000 A B Fair value...
-
On January 1, Year 5, Pic Company acquired 7,500 ordinary shares of Sic Company for $937,500. On January 1, Year 6, Pic Company acquired an additional 2,000 ordinary shares of Sic Company for...
-
What are the five major perspectives in the field of psychology. 1. Name all of the major perspectives (5 perspectives)? 2. Include the major theorists who influenced each perspective? 3. What...
-
Tommy Ltd. Sells t-shirts. The total sales for the week was $8,000 and the contribution margin was $0.96. The company sold 2,000 t-shirts for the week. Compute the variable cost per t-shirt .
-
Improving You-Attitude 1 We expect you will enjoy the benefits from membership. The brochure was not run past Marketing, so it wasn't printed. 3 At McMahon and Associates, we have more than 50 years...
-
Target pricing and cost-based pricing are two pricing strategies used by companies to determine the prices of their products. Please explain why this is important when it comes to accounting. What...
-
I believe that drones are an excellent example of innovative technology that has many useful applications to support both law enforcement and the military. Coincidentally, one of my good friends that...
-
Draw two system sequence diagrams, one for the success scenario of each use case in Question 4 using a UML tool. (1 point) 6. Develop a domain class diagram for ORRS using a UML tool. The domain...
-
Solve each equation. x 3 - 6x 2 = -8x
-
At the Boise Cascade Corporation, lumber mill logs arrive by truck and are scaled (measured to determine the number of board feet) before they are dumped into a log pond. Figure C-5.3 illustrates the...
-
Given the following sales data for product category and sales region, construct at least two different bar charts that display the data effectively: Region West North South 300 200 400 150 XJ-6 Model...
-
Suppose the managers at FedEx/Kinkos wish to meet the increasing demand for color photocopies and to have more reliable service. (Refer to Problem 4-36). As a goal, they would like to have at least a...
-
The partnership of King. Queen, \&- Page has experienced operating losses for three consecutive years. The partners-who have shared profits and losses in the ratio of King, \(15 \%\) : Queen, \(60...
-
ABACUS is a partnership owned by Allen, Bacon, and Cush, who share profits and losses in the ratio of \(1: 3: 4\). The account balances of the partnership at June 30 follow. Requirements 1. Prepare...
-
On June 30, Allie Hayes and Mandy McKay formed a partnership. The women agree to invest equal amounts of capital. Hayes invests her proprietorship's assets and liabilities (credit balances in...
Study smarter with the SolutionInn App