In recent months, Allied’s group has begun to focus on real option analysis. What is real option analysis? Please give two examples of projects with embedded real options
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Part (G)
In recent months, Allied’s group has begun to focus on real option analysis.
What is real option analysis?
Please give two examples of projects with embedded real options?
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- a. Explain the covered call options strategy b. Graphically show a covered call options strategy, including payoff. Explain why an investor mayuse this option strategy.c. Using put-call parity, explain the shape of the payoff line (in part (a) of this question). Whatoption position does it look like and why?Consider the following statement about real options: The value of a real option is found by taking the difference between the expected NPV of a project with the option and the expected NPV of the project without the option. True or False: The preceding statement is correct. False True Which type of real option allows a firm to shut down a project if its cash flows are lower than expected? Investment timing option Flexibility option Abandonment option Growth option King Snowplows began operations in New York City two years ago. As an independent contractor, the company does the majority of its business working for the city. The company also had offers from surrounding cities in New Jersey and Long Island, but these offers would have required the company to invest in additional snowplows—which have high up-front costs. King Snowplows decided to purchase only the snowplows necessary to handle its contract with New York…4. Introduction to real options Consider the following statement about real options: Sometimes real options can give managers the flexibility to decide to invest in a project or wait to make a more calculated decision. True or False: The preceding statement is correct. False True Which type of real option allows the output and/or inputs in the production process to be altered, depending on how market conditions change during a project’s life? A. Expansion option B. Flexibility option C. Abandonment option D. Timing option Consider the following example: Clemens Inc. is considering a $100 million investment in a new line of soft drinks. However, $100 million is a huge investment for Clemens; if things turn bad, it could wipe out the company. A few senior managers have suggested a smaller investment of $20 million to see if the market is as strong as they hope it is. If demand is strong and the opportunity is still…
- Black-Scholes Model Assume that you have been given the following information on Purcell Industries call options: According to the Black-Scholes option pricing model, what is the option’s value?Assume that you have been given the following information on Purcell Corporations call options: According to the Black-Scholes option pricing model, what is the options value?4. Introduction to real options Consider the following statement about real options: Decision tree analysis is more commonly used in valuing securities than real assets. True or False: The preceding statement is correct. True False Which type of real option allows a project to be expanded if demand turns out to be greater than expected? Flexibility option Abandonment option Expansion option Timing option Consider the following example: Smoltz Motors has plants around the country that specialize in specific models of cars. Smoltz has determined that lower demand has led the firm’s inventory of SUVs to be too high. Smoltz wants to stop production for its SUVs and focus on its sedans. This example describes a real option to (expand/ abandon) . Please do not answer in excel, use math formulas Thank you!
- An option holder has long positions in call and put options written on an underlying asset currently priced at €50. Numerically demonstrate the intrinsic values and moneyness ranges for the options using a range of plausible exercise (strike) prices and premiums.Define each of the following terms: i. Investment timing option; growth option; abandonment option; flexibility optionConsider the following statement about real options: Sometimes real options can give managers the flexibility to decide to invest in a project or wait to make a more calculated decision. True or False: The preceding statement is correct. True False Which type of real option allows a project to be expanded if demand turns out to be greater than expected? Expansion option Flexibility option Abandonment option Timing option Consider the following example: King Snowplows began operations in New York City two years ago. As an independent contractor, the company does the majority of its business working for the city. The company also had offers from surrounding cities in New Jersey and Long Island, but these offers would have required the company to invest in additional snowplows—which have high up-front costs. King Snowplows decided to purchase only the snowplows necessary to handle its contract with New York City. The company…
- Options have a unique set of terminology. Define the following terms: (12) Out-of-the-money callGraphically show a covered call options strategy, including payoff. Explain why an investor mayuse this option strategy.Explain how the possible profit and loss possibilities arise for an individual who invests in a: a. A Call Option i. Be sure to explain what a Call Option is. ii. Be sure to incorporate the cost of the Call Option in your analysis. b. A Put Option i. Be sure to explain what a Put Option is. ii. Be sure to incorporate the cost of the Put Option in your analysis.