If an oil well allows the investor the option to drill later, what must happen for the option to be exercised?
A) Increase in interest rates
B) The probability of oil prices increasing must be less than the probability price decreases
C) Oil prices must exceed the present value of future expected oil prices
D) The present value of oil must be higher than the future value of oil

Question

Quizplus · Accepted Answer

In order for the investor to exercise the option to drill later, oil prices must exceed the present value of future expected oil prices. This means that the investor believes the revenue from drilling later will be greater than the revenue from selling the land or leasing it to someone else. The other choices are not relevant to exercising the option.

If an Oil Well Allows the Investor the Option to Drill