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The Dallas/Fort Worth International Airport would like to buy the option to purchase a large parcel of land on the edge of the city of Grapevine from a real estate investor. The option would give the airport the right to buy the land in one year for $10 million. Real estate experts estimate that the land will be worth either $12 million or $8 million in one year. The current value of the land is $9.5 million. If the risk-free rate of interest is 5% per year, what is the fair market value of the option?

[Hint: You can use the replicating portfolio approach or binomial pricing.]

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M91569482

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