Question 1

Which of the following statements applies to hysteresis?

Accepted Answer

A)  Hysteresis occurs when there are both high entry and exit costs. 
B)  Hysteresis refers to the hysteria of a currency crisis 
C)  Hysteresis is a consequence of the intrinsic value of a "now or never" proposition. 
D)  Three of the above 
E)  Two of the above 
A)  Hysteresis occurs when there are both high entry and exit costs. 
B)  Hysteresis refers to the hysteria of a currency crisis 
C)  Hysteresis is a consequence of the intrinsic value of a "now or never" proposition. 
D)  Three of the above 
E)  Two of the above

Question 2

Firms should never invest in emerging markets if the expected net present value (when viewed as a "now or never" alternative) is negative.

Accepted Answer

A) True 
 B)False

Question 3

Real investment options gain value by avoiding bad times, whereas real abandonment options gain value by staying invested during good times.

Accepted Answer

A) True 
 B)False

Question 4

Option values increase with an increase in the volatility of the underlying asset, all else constant.

Accepted Answer

A) True 
 B)False

Question 5

Option pricing methods suggest that managers immediately invest in real options with positive intrinsic values.

Accepted Answer

A) True 
 B)False

Question 6

Call option values INCREASE with ______.

Accepted Answer

A)  an increase in the exercise price 
B)  an increase in the volatility of the underlying asset value 
C)  an increase in the systematic risk (beta) of the asset underlying the option 
D)  More than one of the above 
E)  None of the above 
A)  an increase in the exercise price 
B)  an increase in the volatility of the underlying asset value 
C)  an increase in the systematic risk (beta) of the asset underlying the option 
D)  More than one of the above 
E)  None of the above

Question 7

Multinational corporations usually make incremental investments into emerging markets because of the intrinsic value of these real investment options.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following is FALSE?

Accepted Answer

A)  Options are always more volatile than the assets on which they are based. 
B)  Returns on options are inherently non-normal. 
C)  Returns on options are asymmetric. 
D)  The volatility of an option changes with changes in the value of the underlying asset. 
E)  Option pricing methods discount option payoffs at a risk-adjusted discount rate. 
A)  Options are always more volatile than the assets on which they are based. 
B)  Returns on options are inherently non-normal. 
C)  Returns on options are asymmetric. 
D)  The volatility of an option changes with changes in the value of the underlying asset. 
E)  Option pricing methods discount option payoffs at a risk-adjusted discount rate.

Question 9

Managerial divergence from the NPV decision rule "accept all positive NPV projects" arises because ______.

Accepted Answer

A)  managers' objectives can differ from those of shareholders 
B)  of the presence of real options 
C)  the NPV decision rule is not designed to maximize shareholder wealth 
D)  Three of the above 
E)  Two of the above 
A)  managers' objectives can differ from those of shareholders 
B)  of the presence of real options 
C)  the NPV decision rule is not designed to maximize shareholder wealth 
D)  Three of the above 
E)  Two of the above

Question 10

Option pricing methods suggest that proper application of the NPV rule should consider when to invest and not just whether to invest.

Accepted Answer

A) True 
 B)False

Question 11

The time value of an option is its value as of a particular future date.

Accepted Answer

A) True 
 B)False

Question 12

Firms continue to operate in unfavorable environments ______.

Accepted Answer

A)  because the time value of the abandonment option is zero 
B)  to avoid the sunk costs of abandoning investment 
C)  when there is a chance that prospects will improve 
D)  Three of the above 
E)  Two of the above 
A)  because the time value of the abandonment option is zero 
B)  to avoid the sunk costs of abandoning investment 
C)  when there is a chance that prospects will improve 
D)  Three of the above 
E)  Two of the above

Question 13

All else constant, exogenous uncertainty creates an incentive to postpone investment.

Accepted Answer

A) True 
 B)False

Question 14

An option with more than one source of uncertainty is called a(n) _______ option.

Accepted Answer

A)  amorphous 
B)  complex 
C)  compound 
D)  rainbow 
E)  switching 
A)  amorphous 
B)  complex 
C)  compound 
D)  rainbow 
E)  switching

Question 15

Real options include ______.

Accepted Answer

A)  the expansion/contraction options 
B)  the investment/abandonment options 
C)  the suspension/reactivation options 
D)  Three of the above 
E)  Two of the above 
A)  the expansion/contraction options 
B)  the investment/abandonment options 
C)  the suspension/reactivation options 
D)  Three of the above 
E)  Two of the above

Question 16

Uncertainty is endogenous when the act of investing reveals information about price or cost.

Accepted Answer

A) True 
 B)False

Question 17

Call option values DECREASE with ______.

Accepted Answer

A)  an increase in the underlying asset value 
B)  an increase in the volatility of the underlying asset value 
C)  an increase in the systematic risk (beta) of the asset underlying the option 
D)  More than one of the above 
E)  None of the above 
A)  an increase in the underlying asset value 
B)  an increase in the volatility of the underlying asset value 
C)  an increase in the systematic risk (beta) of the asset underlying the option 
D)  More than one of the above 
E)  None of the above

Question 18

Option values are always more volatile than the asset values on which they are based.

Accepted Answer

A) True 
 B)False

Question 19

Real options are options based on an underlying real (inflation-adjusted) price rather than on a nominal price.

Accepted Answer

A) True 
 B)False

Question 20

The value of growth options typically is included in the firm's reported financial statements.

Accepted Answer

A) True 
 B)False

Exam 16: Real Options and Cross-Border Investment Strategy

Which of the following statements applies to hysteresis?

Firms should never invest in emerging markets if the expected net present value (when viewed as a "now or never" alternative) is negative.

Real investment options gain value by avoiding bad times, whereas real abandonment options gain value by staying invested during good times.

Option values increase with an increase in the volatility of the underlying asset, all else constant.

Option pricing methods suggest that managers immediately invest in real options with positive intrinsic values.

Call option values INCREASE with ______.

Multinational corporations usually make incremental investments into emerging markets because of the intrinsic value of these real investment options.

Which of the following is FALSE?

Managerial divergence from the NPV decision rule "accept all positive NPV projects" arises because ______.

Option pricing methods suggest that proper application of the NPV rule should consider when to invest and not just whether to invest.

The time value of an option is its value as of a particular future date.

Firms continue to operate in unfavorable environments ______.

All else constant, exogenous uncertainty creates an incentive to postpone investment.

An option with more than one source of uncertainty is called a(n) _______ option.

Real options include ______.

Uncertainty is endogenous when the act of investing reveals information about price or cost.

Call option values DECREASE with ______.

Option values are always more volatile than the asset values on which they are based.

Real options are options based on an underlying real (inflation-adjusted) price rather than on a nominal price.

The value of growth options typically is included in the firm's reported financial statements.

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

Filters