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Contracts as Options: Some Evidence from Condominium Developments
Author(s) -
Shilling James D.,
Benjamin John D.,
Sirmans C. F.
Publication year - 1985
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1111/1540-6229.00346
Subject(s) - economics , real estate , valuation of options , black–scholes model , financial economics , variance (accounting) , option fee , actuarial science , microeconomics , econometrics , finance , cost approach , real estate investment trust , accounting , volatility (finance)
This paper values the real estate option to purchase contract in a contingent claims framework. The model is an application of the Black and Scholes option pricing model. Observed market data on the sale of condominiums are used to test if the option is competitively priced under various assumptions regarding the expected instantaneous variance of the condominium price. Simulation results suggest that standard industry practices of charging a fixed amount for the option to purchase roughly conform to pricing behavior dictated by the option pricing model.