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“It is crucial to recognise that projects, just like fruit, do require nurturing. This is because as the time approaches when the project must be carried out or abandoned, the option value will always tend to decline assuming all other variables remain constant. This is because the time to maturity falls and the present value of the exercise price, the investment to be made to carry out the project, is rising.”
sir i do understand this. Especially the last part “PV of exercise price, the investment to…rising”
I assume that you meant to write that you do not understand this, otherwise there is nothing for me to answer!
In the BS formula, the second term containing ‘e’ is calculating the PV of the exercise price. As with all PV’s, the sooner the flow occurs the higher will be the PV.
So subtracting a higher figure results in a lower value for the option.
This makes sense anyway, because the reason that options are worth something is because of the uncertainty of the future flows. The closer we get to having to decide whether or not to exercise the option, the less effect the uncertainty is going to have.
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