Answer to Question 1
D
Answer to Question 2
Real options have numerous applications. For example, a project whose size can be scaled up or down after construction may be worth more than one that you cannot alter. Oil in a storage tank and oil underground both have option values because you have a choice of when to use or extract them.The right to prepay a home mortgage has option value. A plant that can be cheaply shut down for short periods can be worth more than one that must run continuously. High stock prices of new biotechnology firms may reflect the relative ease with which they can undertake and abandon research programs, compared with established pharmaceutical producers that operate on larger scales. Going beyond markets, you might decide whether to file a lawsuit by treating it as an investment and seeing if the expected present value of your winnings is worth the cost. The right to settle or abandon the suit as information develops over the course of the case adds option value to it.53 On a more somber note, there is an option value to flexibility in choosing the time to start a war and in making decisions to continue or abandon it.
