You own a one-year call option on one acre of Los Angeles real estate. The exercise price
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You own a one-year call option on one acre of Los Angeles real estate. The exercise price is $2 million, and the current, appraised market value of the land is $1.7 million. The land is currently used as a parking lot, generating just enough money to cover real estate taxes. The annual standard deviation is 15% and the interest rate 12%. How much is your call worth? Use the Black-Scholes formula, calculates Black-Scholes values (visit this book’s Web site www.mhhe.com/bma).
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