Question 1

The five drivers of call option value are the value of the underlying asset,cost of exercise,risk-free rate,time to investment and volatility.

Accepted Answer

These are the five key factors that impact the value of call options. The value of the underlying asset is the most important driver, followed by the cost of exercise, risk-free rate, time to investment, and volatility.

Question 2

Strategic flexibility might be enhanced by organizational structures,systems,or other internal resources that augment the responsiveness of an organization.

Accepted Answer

Organizational structures, systems, and resources can help an organization to be more agile and responsive to changes in the environment, thus increasing strategic flexibility.

Question 3

Suppose an individual investor purchases a financial call and pays $10 per share to obtain the right,but not the obligation,to purchase 25 shares of a company's stock for $100 in the future.If the firm's share price collapses and the individual investor does nothing,he/she has only lost the original option purchase price of $250 ($10 x 25 shares).

Accepted Answer

Since the investor has only paid for the option and not actually purchased the shares, they are not obligated to exercise the option and purchase the shares if the price drops. Therefore, they only lose the original option purchase price of $250.

Question 4

Cumulative volatility is a variable derived by combining the volatility and cost of exercise parameters.

Accepted Answer

Cumulative volatility is not derived by combining the volatility and cost of exercise parameters. It is a sum of daily volatilities over a certain period of time.

Question 5

Having the right,but not the obligation,to purchase shares of a company's stock in the future helps firms reduce downside risk while accessing upside opportunities.

Accepted Answer

Having the right, but not the obligation, to purchase shares of a company's stock in the future through options contracts helps firms reduce downside risk while potentially accessing upside opportunities. This is because they can choose not to exercise the option if the stock price declines or if it ends up being too expensive, but they can still profit if the stock price increases.

Question 6

Real options analysis offers a means of qualitatively evaluating the role of uncertainty in firms' investment decisions.

Accepted Answer

Real options analysis is a quantitative method used to evaluate investment decisions by considering the value of flexibility and uncertainty, often using financial models and calculations.

Question 7

An option provides a firm with the obligation to take some future specified action.

Accepted Answer

An option gives the holder the right, but not the obligation, to take some future specified action.

Question 8

In the case of call options,uncertainty relates negatively to an option's value.

Accepted Answer

Uncertainty, or volatility, generally increases the value of call options because it raises the potential for higher returns.

Question 9

Only a few techniques are used to value real options.

Accepted Answer

There are multiple techniques used to value real options, including binomial trees, Black-Scholes model, decision trees, and Monte Carlo simulation, among others.

Question 10

For real options,the current value of an underlying asset is equivalent to the current price of a stock.

Accepted Answer

The current value of an underlying asset is not equivalent to the current price of a stock for real options. The current value of an underlying asset is the present value of the expected future cash flows from the asset, while the current price of a stock is the market price of the stock at a given point in time.

Question 11

The degree to which growth options matter within industries varies greatly.

Accepted Answer

This statement is true. The importance of growth options can vary depending on factors such as the industry's level of maturity, competition, and technological changes.

Question 12

Firms that are entrepreneurial tend to have greater strategic flexibility.

Accepted Answer

Entrepreneurial firms are often characterized by their ability to quickly adapt to changing market conditions and shift their strategic focus as needed. This greater strategic flexibility allows them to better navigate uncertainties and take advantage of new opportunities.

Question 13

The value of a firm can be expressed using the formula V = V_AIP + V_GO.

Accepted Answer

The formula V = V_AIP + V_GO represents the value of a firm as the sum of the value of assets in place (V_AIP) and the value of growth opportunities (V_GO).

Question 14

When Joe's Computers made the decision to sell some of its equipment through the resale market,it was exercising the option to defer.

Accepted Answer

The decision to sell equipment through the resale market is an exercise of the option to abandon, not defer. Deferring would involve delaying a decision or action to a later time.

Question 15

The key strength of capital budgeting is that the tools are designed to value passive investments without flexibility.

Accepted Answer

The key strength of capital budgeting is actually its ability to value active investments with flexibility, taking into account factors such as changing market conditions, project risks, and potential future earnings.

Question 16

Critics of real options analysis suggest that it is overly technical and beyond the mathematical competence of many managers.

Accepted Answer

Critics argue that real options analysis relies heavily on mathematics and financial modeling, which may be difficult for non-experts to understand and implement.

Question 17

An equity joint venture is an example of a growth option.

Accepted Answer

An equity joint venture is a growth option as it allows companies to expand their business through collaboration with another company and share expertise, resources, and risks.

Question 18

The primary focus of the real options analysis perspective is centered on operational control.

Accepted Answer

The primary focus of the real options analysis perspective is not on operational control, but on the strategic opportunities and flexibility that come with making investment decisions. It involves evaluating the value of investment opportunities by considering the potential for future changes in market conditions or technology, allowing for flexibility in decision-making.

Question 19

A strategy can be said to be flexible when it can be changed by all parties involved without negative consequences.

Accepted Answer

A strategy is considered flexible when it can adapt to changes and unforeseen circumstances, but changes by all parties without negative consequences are not guaranteed.

Question 20

Investments that confer multiple options that are built upon one another are called compound options.

Accepted Answer

Compound options refer to investments that involve multiple options that are layered on top of each other, with the exercise of one option leading to the creation of another. This creates a more complex investment structure than a simple option.

Quiz 13: Strategic Flexibility and Real Options Analysis