Fundamentals of Corporate Finance (3rd Edition) (Pearson Series in Finance)
Fundamentals of Corporate Finance (3rd Edition) (Pearson Series in Finance)
3rd Edition
ISBN: 9780133507676
Author: Jonathan Berk, Peter DeMarzo, Jarrad Harford
Publisher: PEARSON
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Question
Chapter 21, Problem 1CC
Summary Introduction

Option: Option refers to the right available to invest or disinvest in a particular business or project but without any obligation to make such investment decision at a fixed price on some future date. Therefore, option is taken only when it improves the net present value of the business

To Explain: The holder of an option has to exercise the option or not.

Expert Solution & Answer
Check Mark

Answer to Problem 1CC

No, the holder of an option does not have to exercise it as an option is not an obligation to invest in a project but the right available to make such investment decision. The firm will invest only when the net present value will increase or is positive.

Explanation of Solution

The holder of an option have right to use his/her option to invest in any project, but it is not a compulsion to exercise the right. Therefore, the holder may or may not exercise his/her option.

Conclusion

So, the holder of an option does not have to exercise it.

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