Question
Asked Dec 6, 2019
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On May 25, 2018 you purchased an option which will allow you to sell a commercial building on August 14, 2022 for $42 million. Your current estimate of the value of the commercial building is $38 million.  The annual volatility for the change in the commercial building’s value is 57% and the risk-free rate is 6%.

    1. What type of option is this?
    2. Calculate the value of the option to sell the commercial building.

Please show work in excel and equations/questions used.

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Expert Answer

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Step 1

a) As this option provides the right to exercise the option on expiry alone, it is a European put option.

Step 2

Calculation of the value of option:

Hence, the value of the option is $32.39 million.

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A Particulars Amount 42 2.71828 6% 2 Sale of building (in million) 4.33 5 T (4 years 33 months) 6 Value 32.39

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