The Management at Socrates Motors Considered the Option to Abandon

question 108

Multiple Choice

The management at Socrates Motors considered the option to abandon when building their new manufacturing plant. The design of the plant allows it to easily be converted to manufacture other types of large machinery. If their new line of cars is poorly received, their plant should be easy to sell to another manufacturing company. In this example, the extra cost of building the plant in such a way that it can easily be converted for other uses resembles

• A) the premium of a put option on the plant.
• B) the premium of a call option on the plant.
• C) the strike price of a put option on the plant.
• D) the strike price of a call option on the plant.

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Definitions:

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A statistical concept representing the distribution of a set of data that forms a bell-shaped curve, indicating average scores at the center and deviations spread equally around it.

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