Question

You own a lot in Key West, Florida, that is currently unused. Similar lots have recently sold for $1,250,000 million. Over the past five years, the price of land in the area has increased 7 percent per year, with an annual standard deviation of 36 percent. You would like an option to sell the land in the next 12 months for $1,400,000. The risk-free rate of interest is 3 percent per year, compounded continuously.

What is the price of the put option necessary to guarantee your sales price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

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- 2x DERIVATIVES BINOMIAL - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins % Cut Calibri -11AA = = = Dr Wrap Text General Ea Copy Paste B I U - D E A = 5 st Fat Merge Format Painter Merge & Center Center $ - % % , .0 .00 8. Conditional Format Cell Formatting as Table Styles Clipboard Font Alignment Number Styles U22 L M N O Formula Bar o R т I U Insert Delete Format Σ AutoSum : A Fill Z Sort & 2 Clear Filter Editing Find & Select Cells V W X + in K= 1250000 1400000 0.03 0.36 ra 0 (A) = a T- 10 d. ln (5/6) + (r+0.50² (7) d1 = [In(1250000/1400000) + (0.03 +0.5*(0.36)^2)(1)]/(0.36*(SQRT(1)] d1 = -0.05147 11 12 13 14 15 16 17 18 19 20 21 22 d2 = d1 - 0* SQRT(T) d2 = -0.4115 e^(-0.03*1)= 0.970446 N(d1) = N(D2) = 0.479476 0.340364 Sheet2 RISK NEUTRAL Sheet3 Sheet4 Sheets Sheet6 Sheet7 KOM Rea BINOMIAL BS ferences 1 200 130% o * * O ENG 22-11-2019 CJE 9

DERIVATIVES BINOMIAL - Microsoft Excel (Product Activation Failed) View Add-Ins File Home Insert Page Layout Formulas Data Review - 2x % Cut Σ AutoSum : A Calibri Dr General Wrap Text Merge & Center B I $ - % 8. Fill 2 Clear Formatting as Table Styles Styles -11AA = = = U - D A Font fax N O P Sort & Filter Editing Find & Select Alignment Number E Copy Paste Format Painter Clipboard 041 L 23 Cells M Q R I U V W X 24 value of Put option 25 26 -Y 27 . P = koe n(dz) - S. N(d) 28 29 30 VALUE OF PUT OPTION= 1400000*e^(-0.03*(1))*(1-0.340364) 1400000*(0.970446)*(1-0.340364) 896196.47 245541.56 1200000 *(1-0.479476) 1200000 *(1-0.479476) 650654.91 31 32 33 34 35 36 37 38 39 40 41 Sheet2 RISK NEUTRAL Sheet3 Sheet4 Sheets Sheet6 Sheet7 KOM Rea BINOMIAL BS ferences 200 130% o m * * O ENG 22-11-2019 S ER@g