Question

Which of the following statements is FALSE?

	A	A key distinction between a real option and a financial option is that real options, and the underlying assets on which they are based, are often traded in competitive markets.
	B	In particular, because real options allow a decision maker to choose the most attractive alternative after new information has been learned, the presence of real options adds value to an investment opportunity.
	C	We can compute the value of the real option by comparing the expected profit without the real option to the value with the option.
	D	To make an investment decision correctly, the value of embedded real options must be included in the decision-making process.

Answer 1

Option A is FALSE

Explanation: Real options are capital budget and resource allocation decisions. These decisions are generally related to illiquid assets like R&D projects, Real Estate etc. The underlying assets of real options are illiquid and hard to trade.

Option B: TRUE

Explanation: In the face of uncertainty, the presence of Real options definitely add value to an investment. Real options can be used to correctly evaluate an investment opportunity.

Option C:TRUE

Explanation: The difference between the two scenario is the value of the real option

Option D:TRUE

Explanation: The presence of real options significantly increase the value of investment. So,they must be embedded in the decision making process.