CFA Practice Question

There are 151 practice questions for this study session.

CFA Practice Question

For projects with production facilities, it may not be optimal to operate a plant for a given period if revenues will not cover variable costs. If the price of oil falls below the cost of extraction, for example, it may be optimal to temporarily shut down the oil well until the oil price recovers. This is an example of

A. Timing options.
B. Abandonment options.
C. Fundamental options.
Correct Answer: C

Fundamental options are also valuable in farming (where they may be exercised if the cost of fertilizing, watering and harvesting exceeds the sale price of the product) and real-estate development (where they may be exercised if the cost of construction exceeds rent revenues).

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