Which of the following will NOT increase the value of a real option?
A) an increase in the volatility of the underlying source of risk.
B) an increase in the risk-free rate.
C) an increase in the cost of obtaining the real option.
D) a decrease in the probability that a competitor will enter the market of the project in question.
E) lengthening the time in which a real option must be exercised.

Question

Quizplus · Accepted Answer

An increase in the cost of obtaining the real option would decrease its value. All other options would increase the value of a real option. For example, an increase in volatility increases the potential payoff of the option. Increasing the risk-free rate increases the value of the option because it increases the opportunity cost of not investing in the option. A decrease in the probability of a competitor entering the market of the project in question reduces the risk of the option and thus increases its value. Finally, lengthening the time in which a real option must be exercised increases the chances of a positive outcome and thus increases the value of the option.

Which of the Following Will NOT Increase the Value of a Real