Marsh Property Management is considering the construction of a new development of townhouses in St Kilda. The site for the new development is currently occupied by an office building owned by the city. The project's profitability will depend largely on the population increase in St Kilda over the next several years. Rather than buy the site, Marsh has entered into an agreement with the city to pay $200,000 for the right to purchase the site for $10 million two years from now. The real option embedded in this contract is best described as:

Question

Quizplus · Accepted Answer

The real option embedded in this contract is the option to defer investment. Marsh has paid $200,000 for the right to purchase the site for $10 million two years from now, which means they have the option to wait and see if the population in St Kilda increases as expected before committing to the development. This option allows Marsh to delay the investment decision while reducing their potential losses if the project turns out to be unprofitable. Therefore, choice A is the best answer. The other options (B, C, and D) do not accurately describe the real option embedded in this contract.

Marsh Property Management Is Considering the Construction of a New