Question

You own a lot in Key West, Florida, that is currently unused. Similar lots have recently sold for $1,290,000. Over the past five years, the price of land in the area has increased 5 percent per year, with an annual standard deviation of 34 percent. You would like the option to sell the land in the next 12 months for $1,440,000. 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? (Enter your answer in dollars, not millions of dollars. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 1,234,567.89.)

Price of put option           $

Answer 1

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121 e 39 2002 V ax 3 ENG 19 01 2020 E 5122 - x fix L Formula Bar M N P Q R S T U V W X Y Z AA A 1221 S= K = O 1290000 1440000 0.03 0.34 1 (A) = d. ln (5/6) + (r+0.58² (1) 126 127 128 129 130 131 132 133 134 135 136 d1 = [In(1290000/1440000) + (0.03 +0.5*(0.34)^2)(1)]/(0.34* (SORT(1)] d1 = -0.06530 d2 = d1 - 0* SQRT(T) d2 = -0.4053 137 e^(-0.03*1)= 0.970446 N(01) = N(d2) = 0.473969 0.342630 -value of Put option . P = koe n(dz) - S. N(di) VALUE OF PUT OPTION= VALUE OF PUT OPTION= VALUE OF PUT OPTION= ANSWER VALUE OF PUT OPTION= 1440000*e^(-0.03*(1))*(1-0.342630) 1440000*(0.970446)*(1-0.342630) 918636.59 240056.42 1290000 (1-0.473969) 1290000 (1-0.473969) 678580.16 150 BS call put | RISK NEUTRAL FLORIDA sd=0 COMPENSATION | ZEVON Sheet7 | BINOMIAL DISCRETE