### How much should you charge for the option

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##### Reference no: EM131166176

You own a lot in Key West, Florida, that is currently unused. Similar lots have recently sold for \$1,270,000. Over the past five years, the price of land in the area has increased 7 percent per year, with an annual standard deviation of 36 percent. A buyer has recently approached you and wants an option to buy the land in the next 12 months for \$1,420,000. The risk-free rate of interest is 5 percent per year, compounded continuously.

How much should you charge for the option?

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