QUESTION 10

1. You own a lot in Monte Carlo, Monaco, that is currently not used. Similar lots have sold for $1.08 million. Over the past five years, price of land in the area has increased 4% per year, with an annual standard deviation of 18%. A buyer has asked you and wants an option to buy the land in the next 12 months for $1.35 million. The risk-free rate of interest is 4% per year, compounded continuously. How much should you charge for the option?