7. Applying options in real life Option pricing is applied across various functions in finance. Whereas speculators and option traders write and sell options in an option exchange, corporate finance also uses option pricing in such various areas as real options, risk management, capital structure decisions, and compensation plans. Clemens Inc. is considering a $100 million investment in a new line of soft drinks. However, 100 million is a huge Investment for Clemens; If things turn bad, it could wipe out the company. A few senior managers have suggested a smaller investment of $20 million to see if the market is as strong as they hope it is. If demand is strong and the opportunity is still available, Clemens will increase its investment at a later date. What kind of option does this example describe? A real option to expand A real option to abandon Options are used in several capital structure decisions. TK Corp. decides to issue convertible bonds that will give investors the option to buy Shres of the company at a certain price. You buy a convertible bond of TK Corp. at a coupon rate of 4,365% that matures in six years, in which situation are you more likely to convert the bond or exercise the option? When the issuer's stock price has decreased significantly When the issuer's stock price has increased significantly