Real option vs financial options

May 11th, 2015
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Some questions may require you to use financial calculator or Excel. (In the final exam, for students without financial calculator, writing down the formula will be enough. However, those formulas must be correct to get full credit. Therefore, it is a good practice to check whether you are correct by using Excel for these practice questions) 1. How are real options different from financial options?

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Real OptionPractice Questions-Real OptionsSome questions may require you to use financial calculator or Excel. (In the final exam, for students without financial calculator, writing down the formula will be enough. However, those formulas must be correct to get full credit. Therefore, it is a good practice to check whether you are correct by using Excel for these practice questions)1. How are real options different from financial options?2. Consider the following project data:(1)A $500 feasibility study will be conducted at t = 0. (2)If the study indicates potential, the firm will spend $1,000 at t = 1 to build a prototype. The best estimate now is that there is an 80 percent chance that the study will indicate potential, and a 20 percent chance that it will not. (3)If reaction to the prototype is good, the firm will spend $10,000 to build a production plant at t = 2.

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