Quiz 2
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Learning Objectives

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Now · 1. Option Basics

Learning Objectives

  • Understand option types and payoffs
  • Apply Black-Scholes and binomial models
  • Evaluate real options in capital budgeting

1. Option Basics

Call Option: Right to buy at strike price. Put Option: Right to sell at strike price. Payoff at Expiration:
  • Long Call: max(S - K, 0)
  • Long Put: max(K - S, 0)

2. Black-Scholes Model

C=S0N(d1)−Ke−rtN(d2)C = S_0N(d_1) - Ke^{-rt}N(d_2) d1=ln(S0/K)+(r+σ2/2)tσtd_1 = \frac{ln(S_0/K) + (r + \sigma^2/2)t}{\sigma\sqrt{t}} d2=d1−σtd_2 = d_1 - \sigma\sqrt{t}

3. Real Options in Capital Budgeting

Types: Option to expand, abandon, defer, switch. Traditional NPV analysis ignores flexibility.
Q1: Call option, K=50,S=50, S=55 at expiration. Payoff?
Payoff = max(55-50, 0) = 5∗∗Q2:Putoption,K=5 **Q2: Put option, K=50, S=$45. Payoff?**
Payoff = max(50-45, 0) = $5 Q3: What is a real option?
Management's flexibility to alter decisions in response to new information (expand, contract, defer, abandon a project). Q4: Why is a real option valuable?
It limits downside risk while preserving upside potential, increasing project value beyond static NPV. Join Discord PreviousWorking Capital ManagementNextMergers & Acquisitions
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