Financial options are easier to value than real options for each of the following reasons EXCEPT
A) Exercise prices on financial options are contractually written on a single financial price that is readily observable in the financial market.
B) Markets for real assets have fewer imperfections than financial markets.
C) Real asset markets typically are less competitive than financial markets.
D) Each of the above is a reason why financial options are easier to value.
E) None of the above is a reason why financial options are easier to value.

Question

Quizplus · Accepted Answer

This is because real asset markets have more imperfections, such as uncertainties in project cash flows, market demand, and competition, which make it more challenging to accurately determine the value of real options. Options on financial assets, on the other hand, have more observable and easily determinable values based on financial market prices. Choices A, C, and D are correct reasons why financial options are easier to value.

Financial Options Are Easier to Value Than Real Options for Each