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Contracts as Options: Some Evidence from Condominium Developments

Author

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  • James D. Shilling
  • John D. Benjamin
  • C. F. Sirmans

Abstract

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.

Suggested Citation

  • James D. Shilling & John D. Benjamin & C. F. Sirmans, 1985. "Contracts as Options: Some Evidence from Condominium Developments," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 13(2), pages 143-152, June.
  • Handle: RePEc:bla:reesec:v:13:y:1985:i:2:p:143-152
    DOI: 10.1111/1540-6229.00346
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    Cited by:

    1. Chien-Ming Huang & Ta-Cheng Chang, 2022. "The Valuation of Contract Deposit and Purchase Price," Mathematics, MDPI, vol. 10(23), pages 1-17, November.
    2. L.M. Farrell, 1988. "Hedged Real Estate Portfolios and the Wealth Redistribution Effect of Real Estate Option," Urban Studies, Urban Studies Journal Limited, vol. 25(6), pages 507-519, December.
    3. Yi-Long Hsiao & Chien-Jung Ting, 2022. "Pricing Rent-to-Own Options with a Barrier Level: Taking Housing Contracts as an Example," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 12(5), pages 1-3.
    4. Yuzhakov, Vladimir (Южаков, Владимир) & Dobrolyubova, Elena (Добролюбова, Елена) & Ludmila, Tatarinova (Татаринова, Людмила) & Schukina, T. (Щукина, Т.), 2015. "Methods of Material Incentives in the Civil Service: The Review, Analysis and Proposals [Способы Материального Стимулирования На Государственной Гражданской Службе: Обзор, Анализ И Предложения]," Published Papers madd4, Russian Presidential Academy of National Economy and Public Administration.
    5. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.

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