Reference no: EM132604946

a) A new investor lined up at the Suntra Investment counter to buy his first set of securities ever in his life. While at the queue, he overheard a conversation from some people, also in the queue, regarding the shares of Mermaids ltd that he had hoped to buy. One of the men retorted, "This Mermaid ltd just made a script issue and I think I should sell off my holding therein after the ex-div date as the prices are going to dip in a short while". His colleague nodded in approval and retorted that he didn't have any current holdings in that counter, but he too was going to short-sell that security to make a profit on the obviously impending downside.

This conversation created a great deal of confusion to the new investor and for some time, he contemplated changing his mind on the choice of Mermaid ltd stock, or the entire securities market altogether.

Required:

Tender a well-reasoned case highlighting the best course of action available to this new investor. If possible anchor your response on appropriate theory with practical but hypothetical examples.

b) The overparameterization in financial options models renders them useless in dealing with Real Options problems where flexibility is a prerequisite. Discuss the above assertion with focus on the analogy between the two approaches