Problemyou own a one-year call option to buy one acre of, Ask an Expert

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Problem:

You own a one-year call option to buy one acre of Los Angeles real estate. The exercise price is $2.05 million, and the current, appraised market value of the land is $1.75 million. The land is currently used as a parking lot, generating just enough money to cover real estate taxes. The annual standard deviation is 13% and the interest rate 12%. Suppose the land is occupied by a warehouse generating rents of $175,000 after real estate taxes and all other out-of-pocket costs. The present value of the land plus warehouse is again $1.75 million. You have a European call option.

Requirement:

Question: What is the worth of the European call option?

Note: Please show the work not just the answer.

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M91167044

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