You own a plot of land near the airport that is currently worth $9.5 million.  Local commercial real estate markets are quite volatile.  One year from today the land has a 55% probability of being worth $12 million and a 45% chance of being worth $8.5 million. The airport is considering an expansion and would like you to sell them the right (but not the obligation) to purchase your land for $10 million one year from today.  If the one year government bond yield is 7%.

What is a fair price for the right?

Answer rating: 100% (QA)

To calculate the fair price for the right we can use the riskneutral valua... View the full answer