For every positive net present value project that a firm undertakes,the equity in the firm will increase the most if the delta of the call option on the firm's assets is:
A) equal to one.
B) between zero and one.
C) equal to zero.
D) between zero and minus one.
E) equal to minus onE.

Question

Quizplus · Accepted Answer

A positive net present value project increases the value of a firm's assets, which also increases the value of a call option on those assets. The delta of a call option measures the sensitivity of the option price to changes in the underlying asset price. A delta of one means that the option price will increase by the same amount as the underlying asset price. Therefore, if the delta of the call option on the firm's assets is equal to one, the equity in the firm will increase the most.

For Every Positive Net Present Value Project That a Firm