Answered: What’s the difference between a…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter5: Financial Options

Section: Chapter Questions

Problem 1MC: What is a financial option? What is the single most important characteristic of an option?

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Question

What’s the difference between a financial option
and a real option? What are some specific types
of real options? Do real options just occur, or can
they be “created”?

Expert Solution

Step 1

Answer:

Differences between financial options and real options:

Financial options are those generated on the shares, such as debt or stock instruments. In contrast, real options are those dealing with the actual physical asset. Even the capital budgeting projects will be real physical assets. Regarding the real options, there are more types of real options available that are linked to specific items such as resources like gas, oil, wheat and gold.

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