You own a lot in Key West, Florida, that is currently unused. Similar lots have recently sold for $1.7 million. Over the past five years, the price of land in the area has increased 11 percent per year, with an annual standard deviation of 17 percent. A buyer has recently approached you about buying the land in the next 10 months for $1,920,000. The risk-free rate of interest is 4 percent per year, compounded continuously. You want the option to sell the land to the buyer in one year. What is the price of the transaction today?

You own a lot in Key West, Florida, that is currently unused. Similar lots have recently sold for $1.7 million. Over the past five years, the price of land in the area has increased 11 percent per year, with an annual standard deviation of 17 percent. A buyer has recently approached you about buying the land in the next 10 months for $1,920,000. The risk-free rate of interest is 4 percent per year, compounded continuously. You want the option to sell the land to the buyer in one year. What is the price of the transaction today?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter5: The Time Value Of Money

Section: Chapter Questions

Problem 22P

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