Careful structured quantitative analysis of these

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Unformatted text preview: Options. You own an option to buy a piece of property for $200,000. If you buy the property, you will resell it within six months. You learn that there is 50% chance that an adjacent piece of land will be the site of a new apartment complex. If this happens, the price of your property will be $400,000. If it does not, your property will be worth $100,000. You will know whether the apartment complex is built either in three months or in six months, each being equally likely. Your option expires now and the owner of the property offers to extend it for three months at a price of $30,000. What should you do: Exercise the option, extend it, or do nothing? We will discuss the answers to these questions in class. While you will occasionally hear debate about the mer...
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This note was uploaded on 02/04/2014 for the course ECON 131 taught by Professor Econometrics during the Spring '09 term at Yale.

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