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Option to Expand a Vacant Land Option
Sandile Dladla, Nelisa Magwa, Nokulunga Shangase
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DOI:10.17265/1548-6583/2020.11.003
Pricing options (calls and puts) in general is a complex issue, given the assumptions that one has to make and sometime markets are asymmetric. McKean-Samuelson (1965) is the first model that prices a perpetual American option on a vacant land. Years later, Black and Scholes (1973) create a formula to price a call option on corporate liabilities. In the context of real estate discipline, it seems that there is no formula that prices a call on commercial building, specifically office building on a vacant land. The contribution of this study is exactly responding to the latter statement. The results illustrate that the formula of a commercial building on a vacant land is simply two call options—similar to option straddle.
call on call, commercial building option, vacant land option