Which of the following statements most accurately describes real options available to corporate managers?[Fill in the blank]

Question

BlackTom AI · Accepted Answer

A call option gives the firm the right, but not the obligation, to make a positive investment that increases exposure to upside (think “buy/expand”); a put option gives the firm the right to dispose of or abandon an asset to limit downside (think “sell/abandon”).

Relevant concepts:
- Real option underlying value (V): the present value of project cash flows without the additional action.
- Exercise cost (I): cost to execute the real option (e.g., hiring experts, entering a market, or liquidating).
- Call payoff form: max(V_after − I − V_before, 0) or more simply max(ΔV − I, 0).
- Put payoff form: max(I_salvage − V, 0) when abandoning yields a salvage value.

Step-by-step reasoning:
1. Treat the “hire industry experts to train employees” decision as an investment that can increase future project value by ΔV at a cost I. The firm will only pay I if the net benefit is positive. That exactly matches a call: the right to make an investment that increases upside, with payoff max(ΔV − I, 0).
2. Option a: “expand into a new market” is an opportunity to increase scale and capture additional upside — this is a call, not a put. The stem labels it a put, so a is incorrect.
3. Option b: “liquidate an existing investment project” is the right to sell/exit and recover salvage — that limits downside and is therefore a put, not a call. So b is incorrect.
4. Option d: “delay an investment” (deferral) is the right to wait and invest later if conditions improve — that is also a call-type option (postponing the purchase of the project), not a put. Thus d is incorrect.

Why c is correct:
Hiring experts is an optional, value-enhancing investment the firm can choose to exercise only when benefits exceed cost; payoff structure and decision logic align with a call option.

Conclusion: The correct choice is c. An option to hire industry experts to train the firm’s employees is a call option.

Which of the following statements most accurately describes real options available to corporate managers?[Fill in the blank]Single choice

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