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Finance: Real Options

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Read the following statements:

Critics say that because real options don't expire according to contract as financial options do, managers can't be counted on to pull the plug on a project (exercise an abandonment option) when they should. Also, projects assume lives of their own, and may not be easy to kill.

Do you agree with the above statements? Explain why yes or why no. To support your answer provide some examples and make sure to draw upon the materials from your textbooks.

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REAL AND FINANCIAL OPTIONS

"Critics say that because real options don't expire according to contract as financial options do, managers can't be counted on to pull the plug on a project (exercise an abandonment option) when they should. Also, projects assume lives of their own, and may not be easy to kill".

SOLUTION:

YES. Real options do not expire according to contract and projects cannot just be abandoned anytime.
Investments may be made in two forms - financial or real assets. Financials assets take the form of securities such as stocks and bonds. Real assets may take the form of tangible assets such as real estate, precious gems, or in the case of companies, their investments may take the form of project expansions such as product development, market development, acquisitions of new companies, and ...

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Elisa Valdez, PhD
Education
  • Bachelor of Science in Business Administration, University of the Philippines
  • Master in Business Administration, Saint Mary's University
  • Doctor of Philosophy in Education, University of the Philippines
  • Doctor in Business Adminstration (IP), Polytechnic University of the Philippines
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