Guest Lecture: Options

Question 1

An option is a right but not an obligation to take action - option valuation puts value on the opportunity to react (flexibility)

True/ False

Answer 1

True

Question 2

A ___ option gives the right to buy the underlying asset worth “P” today at an exercise price of “EX”, “T” years from today.

Fill in the blank word

Answer 2

Call

Question 3

A ___ option gives the right to sell the underlying asset worth “P” today at an exercise price of “EX”, “T” years from today.

Fill in the blank word

Answer 3

Put

Question 4

Following statement is NOT true for a put option:
A) limited downside - the option value cannot be negative
B) the lower the value of the underlying, the higher the value of the option
C) gives the right, not the obligation, to sell the underlying at a predetermined exercise price
D) has unlimited upside

Answer 4

False D) has unlimited upside

The underlying’s value has a lower limit of zero, meaning that when this boundary is reached, the put option’s payoff is maximized. I.e., as soon as the underlying’s price reaches zero, there are no additional gains from the put

Question 5

The underlying asset is always riskier than the option

True/False

Answer 5

False: the option is always riskier than the underlying asset

Question 6

Mention as many types of real options as possible

Answer 6

1) defer
2) switch
3) monthball
4) expand/ contract
5) speed up/ slow down
6) Abandon
7) Salvage

Question 6

Which of the following statements are true about options (real and financial)? Select all correct
A) options are everywhere: salaries, financial, real
B) option valuation reveals the value consequence of creating and exercising opportunities and flexibility
C) option valuation highlights the value of competent management
D) options are heavily applied in practical corporate finance
E) option theory helps improve decision making and project selection