Which circumstance will NOT increase the value of a real option?
A)lengthening the time in 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

Question

Quizplus · Accepted Answer

Increasing the cost of obtaining the real option will decrease its value, as it makes it more expensive to exercise the real option. The other options (A, B, and C) will all increase the value of a real option. Lengthening the time in which a real option must be exercised provides more flexibility, an increase in the volatility of the underlying source of risk provides more potential for profit, and an increase in the risk-free rate increases the value of future cash flows.

Which Circumstance Will NOT Increase the Value of a Real