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

Question

Quizplus · Accepted Answer

An increase in the cost of obtaining the real option would not increase the value of the real option. Instead, it would make the option more expensive to acquire, thereby reducing its net value to the holder. Other factors like lengthening the exercise time, increasing volatility, increasing the risk-free rate, and decreasing the probability of competitor entry generally increase the value of a real option by either providing more flexibility, increasing the potential for higher returns, or reducing competitive threats.

Which One of the Following Will NOT Increase the Value