According to Real Option Theory, Even If Construction Were Instantaneous

question 20

Multiple Choice

According to real option theory, even if construction were instantaneous, it might be optimal not to immediately build a project whose value currently exceeds its construction cost, because:

• A) There is sufficient probability that the value of the project will rise sufficiently in the future, and building today is mutually exclusive with building in the future.
• B) There is sufficient probability that the value of the project will fall sufficiently far in the future such that you would lose money if you built it today.
• C) There is never any reason to exercise a call option before its expiration date.
• D) The cost of construction can be invested at a rate less than the cap rate or current cash yield) of the completed project.

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Definitions:

Underlying Stock

This refers to the stock on which derivative contracts, such as options and futures, are based.

American Call

A type of call option that can be exercised at any time before its expiration date.

European Call

An option contract that gives the holder the right, but not the obligation, to buy a specific asset at a specified price within a fixed period, applicable only at the expiration date.

Expiration Date

The specified date on which an option, futures contract, or other derivative expires, and settles by either physical delivery or cash settlement.