According to Real Option Theory, Even If Construction Were Instantaneous

question 9

Multiple Choice

According to real option theory, even if construction were instantaneous and the property market were perfectly liquid, 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:

Black-Scholes

A mathematical model of a financial market containing derivative investment instruments, primarily used for pricing European call and put options.

European Options

Financial derivatives that give the holder the right, but not the obligation, to buy or sell an asset at a specified price on a specified expiration date, unlike American options, which can be exercised at any time before expiry.

Pricing Model

A method or algorithm used to determine the selling price of a product or service, taking into account costs, market conditions, and profit margins.

Standard Deviation

A statistical measure of the dispersion or variance in a set of data points, widely used to assess the risk associated with a financial asset's return.