Question 1

Returns on options are approximately normally distributed.

Accepted Answer

A) True 
 B)False  False

Question 2

Discounted cash flow and option pricing approaches to project valuation are incompatible; when one approach is used, the other should not be used.

Accepted Answer

A) True 
 B)False  False

Question 3

Exogenous uncertainty can create an incentive to speed up investment in order to gain more information about likely future prices and costs.

Accepted Answer

A) True 
 B)False  False

Question 4

The value of the firm's growth options is reflected in the market value of equity.

Accepted Answer

A) True 
 B)False

Question 5

The intrinsic value of an option is its present value assuming markets are informationally efficient.

Accepted Answer

A) True 
 B)False

Question 6

A part of the exercise price of the investment option is the foregone value from investing in a more attractive future project.

Accepted Answer

A) True 
 B)False

Question 7

The abandonment option is a form of put option.

Accepted Answer

A) True 
 B)False

Question 8

The intrinsic value of an option to invest in a real asset reflects ______.

Accepted Answer

A)  managerial flexibility in the timing of investment 
B)  the value of the asset as a "now or never" proposition 
C)  the value of the option to delay investment 
D)  Three of the above 
E)  Two of the above 
A)  managerial flexibility in the timing of investment 
B)  the value of the asset as a "now or never" proposition 
C)  the value of the option to delay investment 
D)  Three of the above 
E)  Two of the above

Question 9

As the value of the underlying asset increases, the value of a call option increases.

Accepted Answer

A) True 
 B)False

Question 10

The value of an option to invest in a real asset reflects ______.

Accepted Answer

A)  managerial flexibility in the timing of investment 
B)  the value of the asset as a "now or never" proposition 
C)  the value of the option to delay investment 
D)  Three of the above 
E)  Two of the above 
A)  managerial flexibility in the timing of investment 
B)  the value of the asset as a "now or never" proposition 
C)  the value of the option to delay investment 
D)  Three of the above 
E)  Two of the above

Question 11

The time value of an option to invest in a real asset reflects ______.

Accepted Answer

A)  managerial flexibility in the timing of investment 
B)  the value of the asset as a "now or never" proposition 
C)  the value of the option to delay the project 
D)  Three of the above 
E)  Two of the above 
A)  managerial flexibility in the timing of investment 
B)  the value of the asset as a "now or never" proposition 
C)  the value of the option to delay the project 
D)  Three of the above 
E)  Two of the above

Question 12

Uncertainty that is outside the firm's control is called _______ uncertainty.

Accepted Answer

A)  amorphous 
B)  compound 
C)  endogenous 
D)  exogenous 
E)  foreign 
A)  amorphous 
B)  compound 
C)  endogenous 
D)  exogenous 
E)  foreign

Question 13

Assets-in-place are those assets in which the firm has already invested.

Accepted Answer

A) True 
 B)False

Question 14

Endogenous uncertainty creates an incentive to speed up investment in order to gain additional information and resolve the uncertainty.

Accepted Answer

A) True 
 B)False

Question 15

The decision to invest in a project today must be compared with the alternative of investing in the same or similar projects at some future date.

Accepted Answer

A) True 
 B)False

Question 16

Uncertainty is exogenous when it is outside the firm's control.

Accepted Answer

A) True 
 B)False

Question 17

Financial options are easier to value than real options for each of the following reasons EXCEPT

Accepted Answer

A)  Exercise prices on financial options are contractually written on a single financial price that is readily observable in the financial market. 
B)  Markets for real assets have fewer imperfections than financial markets. 
C)  Real asset markets typically are less competitive than financial markets. 
D)  Each of the above is a reason why financial options are easier to value. 
E)  None of the above is a reason why financial options are easier to value. 
A)  Exercise prices on financial options are contractually written on a single financial price that is readily observable in the financial market. 
B)  Markets for real assets have fewer imperfections than financial markets. 
C)  Real asset markets typically are less competitive than financial markets. 
D)  Each of the above is a reason why financial options are easier to value. 
E)  None of the above is a reason why financial options are easier to value.

Question 18

Managerial actions can appear to be inconsistent with the NPV rule because ______.

Accepted Answer

A)  managers are irrational 
B)  markets are inefficient 
C)  options on real assets are difficult to value with NPV 
D)  Three of the above 
E)  Two of the above 
A)  managers are irrational 
B)  markets are inefficient 
C)  options on real assets are difficult to value with NPV 
D)  Three of the above 
E)  Two of the above

Question 19

Firms seldom remain in markets in which they are losing money.

Accepted Answer

A) True 
 B)False

Question 20

Option pricing methods suggest that imposing higher hurdle rates on immediate investment in uncertain environments is irrational.

Accepted Answer

A) True 
 B)False

Exam 16: Real Options and Cross-Border Investment Strategy

Returns on options are approximately normally distributed.

Discounted cash flow and option pricing approaches to project valuation are incompatible; when one approach is used, the other should not be used.

Exogenous uncertainty can create an incentive to speed up investment in order to gain more information about likely future prices and costs.

The value of the firm's growth options is reflected in the market value of equity.

The intrinsic value of an option is its present value assuming markets are informationally efficient.

A part of the exercise price of the investment option is the foregone value from investing in a more attractive future project.

The abandonment option is a form of put option.

The intrinsic value of an option to invest in a real asset reflects ______.

As the value of the underlying asset increases, the value of a call option increases.

The value of an option to invest in a real asset reflects ______.

The time value of an option to invest in a real asset reflects ______.

Uncertainty that is outside the firm's control is called _______ uncertainty.

Assets-in-place are those assets in which the firm has already invested.

Endogenous uncertainty creates an incentive to speed up investment in order to gain additional information and resolve the uncertainty.

The decision to invest in a project today must be compared with the alternative of investing in the same or similar projects at some future date.

Uncertainty is exogenous when it is outside the firm's control.

Financial options are easier to value than real options for each of the following reasons EXCEPT

Managerial actions can appear to be inconsistent with the NPV rule because ______.

Firms seldom remain in markets in which they are losing money.

Option pricing methods suggest that imposing higher hurdle rates on immediate investment in uncertain environments is irrational.

An Introduction to Multinational Finance

World Trade and the International Monetary System

Foreign Exchange and Eurocurrency Markets

The International Parity Conditions and Their Consequences

Extension: the International Parity Conditions and Their Consequences

Currency Futures and Futures Markets

Currency Options and Options Markets

Currency Swaps and Swaps Markets

Multinational Treasury Management

Extension: Multinational Treasury Management

Managing Transaction Exposure to Currency Risk

Managing Operating Exposure to Currency Risk

Managing Translation Exposure and Accounting for Financial Transactions

Foreign Market Entry and Country Risk Management

Multinational Capital Budgeting

Multinational Capital Structure and Cost of Capital

Taxes and Multinational Corporate Strategy

Corporate Governance and the International Market for Corporate Control

International Capital Markets

International Portfolio Diversification

International Asset Pricing

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