For every positive net present value project that a firm undertakes,the equity in the firm will increase the most if the delta of the call option on the firm's assets is:
A)equal to one.
B)between zero and one.
C)equal to zero.
D)between zero and minus one.
E)equal to minus one.

Question

Quizplus · Accepted Answer

When the delta of a call option on a firm's assets is equal to one, it means that for every dollar increase in the value of the underlying asset, the value of the call option increases by the same amount. In the context of a firm undertaking a positive net present value (NPV) project, this scenario implies that the equity in the firm (which can be viewed as a call option on the firm's assets) will increase the most, as the project's positive NPV directly translates to an increase in the firm's asset value, and consequently, a proportional increase in the equity value.

For Every Positive Net Present Value Project That a Firm