Question

Given are the following statements:

I. An increase in the maturity increases the value of the option to defer a project (ceteris paribus)

II. An increase in the volatility decreases the value of the option to defer a project (ceteris paribus)

Assume that these changes do not affect the underlying value.

Only statement I is true

Neither of the statements are true

Both statements are true

Only statement II is true

Answer 1

When increase in maturity, will increase the value of the option to defer project because it would be helpful in providing up with the option holder with more chances of exercise the option and it would be overall helpful in extending the time limit to exercise the option

An increase in volatility will also be increasing the value of the option as it can be seen through increase in the volatility is always helpful for both the call option and put option because the probability of getting the the value of exercise of that option magnified.

Only statement one is true.

Correct answer is option ( A)Only statement I is true