Test for certificate Due Jun 14, 12:29 PM IST

Graded Quiz • 45 min

4.1. Introduction to Real

Options Try again once you are ready GRADE

QUIZ • 45 MIN TO PASS 55% or higher

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45.45%
4.2. The Core:

Test for certificate

Fundamentals

Video: Timing option

5 min Review Learning Objectives

Video: Risk neutral

Test for certificate
valuation
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6 min

4.3. The Core: Valuation of

45.45%
Real Options
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Video: Valuing an R&D Tryto
1. The opportunity to defer investing again
a later date may have value because: 0 / 1 point
project DUE DATE Jun 14, 12:29 PM IST ATTEMPTS 3 every 28 days

10 min I) The cost of capital may decline in the near future

Video: Option to expand or

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II) Market conditions may change and decrease the NPV of the project
contract View Feedback
7 min TO PASS 55% or higher 45.45%
Only statementWe
I iskeep
trueyour highest score
Practice Quiz: Option to
invest Neither of the statements are true
4 questions
Both statements are true
Video: Answer to practice
quiz 'Option to invest' Only statement II is true
9 min

Practice Quiz: Option to

expand or contract Incorrect
4 questions
Which parameters influence the real option value?
Video: Answer to practice
quiz 'Option to expand or
contract'
5 min 2. Consider the company Unilever N.V., a large multinational company within the consumer goods sector. The net present 0 / 2 points
value from
Practice Quiz: Option to
abandon its Refreshment division 𝑉 evolves over time (with constant factors 𝑢 and 𝑑). Unilever N.V. has the possibility to abandon
4 questions this business division in five years (t=5).

Video: Answer to practice

quiz 'Option to abandon' Now assume that the company can decide to abandon the business in every period t instead of only at t=5.
6 min

Which statement is most likely to be correct?

4.4 Beyond the Core:
Technical videos (optional)
The value of the option to abandon increases when we have the possibility to abandon at every period 𝑡 instead of
Video: Option replication only at 𝑡=5, especially when we now decide to abandon before 𝑡=5.
and risk neutral valuation
13 min The value of the option to abandon does not change when we have the possibility to abandon at every period 𝑡
instead of only at 𝑡=5. Even if we now decide to abandon before 𝑡=5.
Video: Multi-period,
continuous, and compound
If we still decide to abandon the option only at t=5, then the value of the option decreases.
models
9 min
The value of the option to abandon decreases when we have the possibility to abandon at every period 𝑡 instead of
4.5 Discussion only at 𝑡=5, because more decisions nodes are added.

Discussion Prompt: Real

options in venture capital
20 min Incorrect
With real options we measure flexibility. In this view flexibility is valuable.
Getting the Certificate (3/4)

Reading: Checklist
2 min
3. What type of real option is embedded in a production facility that is flexible in terms of possible input 0 / 1 point
Quiz: Test for certificate
materials?
15 questions

Case Study Option to switch

Option to invest

Option to temporarily shut down

Option to defer

Incorrect
What is given about an investment opportunity? Or does this production facility derive its option value from
another property?

4. Given are the 0 / 1 point

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

Incorrect
If the maturity or volatility changes, does it become more likely that our option will be in the money (increase
in option value) or less likely (decrease in option value)?

5. Consider the acquisition of an oil drilling company as a real option under uncertainty of oil prices. 0 / 1 point
Suppose that the OPEC sets production limitations. What is the most likely effect of this event
on the value of the real option to invest?

This event
decreases the option value

This event has

no effect on the option value

It is not
possible to say what the effect will be

This event increases the option value

Incorrect
What kind of real option is an acquisition? To what kind of financial option is this analogous? Consider the
factors which affect the value of this option? Which factor that influences option value does the decision of the
OPEC affect the most?

6. A manufacturer uses risk neutral valuation to assess the value of an opportunity to expand its business. What do you 0 / 1 point
know about the
risk attitude of the manufacturer?

Risk seeking

Risk neutral

Risk averse

Impossible to say

Incorrect
What kind of framework do we use for valuing real options? What is one of the main underlying assumptions?
How does risk-attitude affect this assumption and the framework?

7. What do we assume about the rate of return on underlying assets when we use risk-neutral probabilities to value these 1 / 1 point
assets?

Risk free rate

WACC

Cost of equity

Cost debt

Correct
Which discount factor do we use?

8. Let the present value of cash flows of a company be denoted by V = 100. This value can move up V = 125 the next period. 2 / 2 points
The risk free rate is equal to 4%. What is the risk neutral probability? Please use a period to indicate the decimal place (e.g.
0.67 instead of 0,67).

0.53

Correct
u = Vu/V0 , d= 1/u. The risk neutral probability is calculated as p = ((1+r)-d)/(u-d)

9. The risk neutral probability is equal to 0.6 and the risk free rate is 5%. Furthermore the present value of cash flows is 2 / 2 points
equal to V = 100. If d = 1/u, then what is the value of V in the downstate in the next period? Please round your answer to
one decimal place and use a period to indicate the decimal place (e.g. 100.7 instead of 100,7).

84.1

Correct
p = ( (1+r)-d)/(u-d) = 0.6. Solve for u and use d = 1/u for V*u and V*d

10. The present value of cashflows is equal to V = 100. This value can move up the next period with u = 1.3 to V = 130. The up 2 / 2 points
factor is u = e^σ and the down factor is d = 1/u. Calculate the volatility σ for one period, expressed in decimals rounded to
two digits. Please use a period to indicate the decimal place (e.g. 0.75 instead of 0,75).

0.26

Correct
The up factor u = e^σ. We can calculate u by u = 130/100 = 1.3

Then σ = ln(1.3).