A real estate investor has the opportunity to purchase land currently zoned residential. If the county board
Question:
A real estate investor has the opportunity to purchase land currently zoned residential. If the county board approves a request to rezone the property as commercial within the next year, the investor will be able to lease the land to a large discount firm that wants to open a new store on the property. However, if the zoning change is not approved, the investor will have to sell the property at a loss. Profits (in thousands of dollars) are shown in the following payoff table:
rezoning approve | rezoning not approve | |
decision alternative | s1 | s2 |
purchase d1 | 640 | -200 |
do not purchase d2 | 0 | 0 |
If the option will cost the investor an additional $40,000, should the investor purchase the option?
Yes
Why or why not?
What is the maximum that the investor should be willing to pay for the option?
An Introduction to Derivative Securities Financial Markets and Risk Management
ISBN: 978-0393913071
1st edition
Authors: Robert A. Jarrow, Arkadev Chatterjee