Select all that are true with respect to real options. Out-of-the-money real options have value. In-the-money real options need not be exercised immediately. Waiting is often valuable. One can often create value by exploiting real options.
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- Why must real options have positive value? (Select all the choices that apply.) A. Having the real option but not the obligation to act is valuable. B. Real options must have positive value because they can always be sold to recover the initial investment. C. Real options must have positive value because they are only exercised when doing so would increase the value of the investment. D. If exercising the real option would reduce value, managers can allow the option to go unexercised.The major principles to remember when considering real options include all of the following EXCEPT: A. waiting is valuable. B. in-the-money real options need to be exercised immediately. C. out-of-the-money real options have value. D. create value by exploiting real options.Consider the following statement: “In contexts of increased uncertainty, the usefulness of real options when valuing an investment opportunity increases”. Do you agree with this statement? Explain your answer.
- Options can be risky because it's a leveraged strategy. True or FalseWhat is the maximum value that a call can take? Why? Explain which option (i.e. put or call) positions (i.e. long or short) offers the most risk.Explain briefly how the Monte Carlo Method differs from traditional models for pricing options and why it is often considered a method of last resort for pricing options?
- In our study of Real Options, we learned about the many benifits of Real Options. Of the below, which is FALSE? O A. Given the option to delay, an investment that currently has a negative NPV can have a positive value. O B. As the level of uncertainty increases, the benefit of waiting is diminished. OC. In a real option analysis, the dividends correspond to any value from the investment that we give up by waiting. O D. By delaying an investment, we can base our decision on new information.Which of the following statements is FALSE? A. You invest today only when the NPV of investing today exceeds the value of the option of waiting, which from option pricing theory we know to be always positive. B. When you do not have the option to wait, it is optimal to invest in any positive−NPV project. C. One way to see why you sometimes choose not to invest in a positive−NPV project is to think about the decision of when to invest as a choice between two mutually exclusive projects: (1) invest today or (2) wait. D. When you have the option of deciding when to invest, it is usually optimal to invest only when the NPV is positive but close to zero.Real options analysis is an investment analysis tool that looks at an investment or activity as a series of sequential steps, and for each step, the investors have the option of: 1) investing additional funds to grow or accelerate, 2) delaying, shrinking the scale of, or abandoning an activity. However, analyzing and making decisions on these options is often easier said than done. Which of the following illustrates the potential pitfalls of real option analysis? The managers involved with the analysis lose their ability to objectively assess the options due to an inflated sense of their ability to reduce risks inherent in the decision-making process. Due to a lack of subjectivity when formally modeling a real option, managers may have an incentive to choose variance values that diminish the likelihood of project approval. A prevailing tendency on the part of managers to operate in a highly conservative manner thereby resulting in the investment approval criteria not being met. A…
- Explain why the delta hedging of a negative gamma options position loses money.Options have a unique set of terminology. Define the following terms: (12) Out-of-the-money callWhat’s the difference between a financial optionand a real option? What are some specific typesof real options? Do real options just occur, or canthey be “created”?