You own a one-year call option to buy one acre of Los Angeles real estate. The e

Question

You own a one-year call option to buy one acre of Los Angeles real estate. The exercise price is $2.12 million, and the current, appraised market value of the land is $1.82 million. The land is currently used as a parking lot, generating just enough money to cover real estate taxes. The annual standard deviation is 15% and the interest rate 14%. Suppose the land is occupied by a warehouse generating rents of $210,000 after real estate taxes and all other out-of-pocket costs. The present value of the land plus warehouse is again $1.82 million. You have a European call option. What is it worth of the European call option? (Enter your answer in millions. Do not round intermediate calculations. Round your answer to 4 decimal places.)

You own a one-year call option to buy one acre of Los Angeles real estate. The exercise price is $2.12 million, and the current, appraised market value of the land is $1.82 million. The land is currently used as a parking lot, generating just enough money to cover real estate taxes. The annual standard deviation is 15% and the interest rate 14%. Suppose the land is occupied by a warehouse generating rents of $210,000 after real estate taxes and all other out-of-pocket costs. The present value of the land plus warehouse is again $1.82 million. You have a European call option. What is it worth of the European call option? (Enter your answer in millions. Do not round intermediate calculations. Round your answer to 4 decimal places.)

Explanation / Answer

The worth of european call option is max(0, underlying-execrcise price)

Here underlying - exercise price is negative so the worth of european call option is 0.

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