Real Options in Investment Decision-Making

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What is a key characteristic of the real option approach in investment decision-making?

Passive interference of management

Active interference of management (correct)

Ignoring future volatility in investment decisions

Lack of flexibility in investment decisions

What is a key benefit of incorporating real options in investment projects?

Reducing shareholder value

Generating higher shareholder value (correct)

Increasing investment costs

Decreasing flexibility in investment decisions

What type of real option can be executed exactly at the expiry date?

Flexible facility option

American option

European option (correct)

R&D investment option

What is an example of a real option in the context of production?

Unused capacity of machines Signup and view all the answers

What is a key feature of a real option that generates value?

Considering future volatility Signup and view all the answers

What is a key characteristic of real options in the context of investment decision-making?

Tied with the choice and the decision maker Signup and view all the answers

What is the primary reason why the time value of a real option increases as the time to expiry date increases?

The situation is more likely to change for the better Signup and view all the answers

What is the total value of a real option comprised of?

The sum of the internal and time value of the option Signup and view all the answers

In the example of the pharmaceutical company, what was the value of the option to alter the operating scale of the project?

9,9 M CZK Signup and view all the answers

What type of option is the option to stage the project in the example of the pharmaceutical company?

Compound option call on call Signup and view all the answers

What was the NPV of the project without the inclusion of the real option in the example of the pharmaceutical company?

17,9 M CZK Signup and view all the answers

What is the purpose of conducting real options analysis in a project?

To identify the different options available in the project Signup and view all the answers

What is a characteristic of the Stochastic binomial model?

It is applicable for both European and American options Signup and view all the answers

Under what conditions is it worth considering real options?

When the NPV of the project fluctuates around zero or is slightly below zero Signup and view all the answers

What is the effect of increasing volatility on the internal value of a real option?

It increases the internal value Signup and view all the answers

What is an assumption of the Black-Scholes model?

There are perfect markets Signup and view all the answers

What is the relationship between the rate of return of an asset and the risk-free rate in the context of real options?

The rate of return of an asset is equal to the risk-free rate Signup and view all the answers

What is a characteristic of the internal value of a real option?

It cannot be negative Signup and view all the answers