Please explain why chose what you choose. Which of the following statements abou
ID: 2754024 • Letter: P
Question
Please explain why chose what you choose.
Which of the following statements about real options is false?
A. The more volatile the underlying source of risk, the more valuable the option.
B. In general, the longer before a real option must be exercised, the more valuable it is.
C. If interest rates fall, the values of real options will increase.
D. Real options often add considerable value to projects, so ignoring them could lead to downward-biased NPVs and systematic underinvestment.
E. While sometimes it is not possible to quantify the value of a project with real options, managers should still think about real options in the framework of this equation: True NPV = NPV without options + NPV of options.
Explanation / Answer
It is true that real options often add considerable value to projects and While sometimes it is not possible to quantify the value of a project with real options , the equation True NPV=NPV without options +NPV of options.
So statement D &E are true.
Also like call options , the value of a real option increases with the increase in variance of underlying asset and the the real option value increases with increase in time to expiration.
so statement A & B are True.
However , like call options , the value of real options increases with increase in risk free rate. So the statement C that If interest rates fall, the values of real options will increase is FALSE