If an oil well allows the investor the option to drill later,what must happen for the option to be exercised?
A)Interest rates must increase.
B)The probability of oil prices increasing must be less than the probability of oil prices decreasing.
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

For an investor to exercise the option to drill later, oil prices must exceed the present value of future expected oil prices. This is because if oil prices are expected to increase in the future, the investor would exercise the option and drill later, but if the probability of oil prices increasing is less than the probability of oil prices decreasing, the investor would not exercise the option. Additionally, interest rates and the present and future values of oil are not directly related to the exercise of the option.

If an Oil Well Allows the Investor the Option to Drill