it can help shed some light on the impact of the ongoing uncertainty about brexit. we want to keep things as simple as possible, so in this example the only uncertainty surrounds a discrete event, at some point in the future, that has a lasting effect on the profitability of a particular investment project. until the uncertainty is resolved ( i. e. until the event occurs ) the project yields a fixed rate of return r and can be financed at a known rate ρ. when the event does occur the outcome is either good, in which case the project makes a proportionate gain of g ( in expected - present - value terms ), or a bad one, resulting in a present - value loss on the project of l > 0. thus, if it were to leave its decision until the uncertainty is resolved, and it discovers the outcome of the event, the firm would go ahead with the project only if the news was good. the probabilities of these outcomes, conditional on the event occurring, are 1 - λ and λ respectively. as for the event itself, this has a per - period chance q of being realised. this means the expected duration of the uncertainty e [ t ] is equal to 1 / q. if the firm expects to have to wait a long time for things to become clear this equates to a low value of q – there isn ’ t much of a chance, in any given period, of the uncertainty being resolved. a high value of q corresponds to an expectation that the resolution is imminent. there is a direct parallel between the nature of this extra margin required for real investment decisions and the value of an option in financial markets. a financial “ call ” option gives its owner the right to buy an underlying security for a pre - set price, known as the “ strike ”. if the price of the security in the spot market rises above that level the owner can “ exercise ” the option and buy it for less than it ’ s now worth. in that sense he or she enjoys the same exposure to good news – to upside moves in the spot price – as the owner of the underlying security itself. the big difference is what happens when there ’ s bad news ( i. e. if the spot falls below the strike ), the owner of the underlying security loses money but the owner of the option does not. that ’ s simply because he or she can always choose not to exercise the thing. thus the fundamental value of a financial call option

##ly they ’ re exactly the same. all speeches are available online at www. bankofengland. co. uk / publications / pages / speeches / default. aspx the cost of capital and employment the underlying point through all of this – that downside risks have particularly marked effects on decisions that are costly to reverse – is, i think, perfectly intuitive. one ’ s naturally wary about decisions that involve a degree of commitment but uncertain outcomes. buying a house, taking a particular job, even getting married9 : these are all decisions that are costly to reverse, to one degree or another, and that therefore require an extra degree of surety to be taken. you can also find examples of the same phenomenon within the economic sphere but unrelated to investment. chart 8, for example, plots changes in our series on uncertainty against the ratio of two particular indices for hiring intentions – one for temporary posts, the other permanent – taken from the kpmg / rec employment survey. as you might expect, firms ’ hiring intentions lean more towards temporary rather than permanent jobs, because the former involve less of a commitment, when they ’ re more uncertain about the future. chart 8 : employment growth skews towards chart 9 : more uncertainty boosts employment temporary jobs when uncertainty rises relative to investment sources : kpmg, rec, ihs markit, bloomberg finance l. p., cbi, consensus economics, dow jones factiva, eikon from refinitiv, gfk ( research on behalf of the european commission ) and bank calculations. sources : ons, bloomberg finance l. p., cbi, consensus economics, dow jones factiva, eikon from refinitiv, gfk ( research on behalf of the european commission ) and bank calculations. but the degree of commitment is bound to be greater, compared with job creation of any kind, for new capital investment. and it ’ s clear in the data that it ’ s investment that ’ s particularly susceptible to uncertainty, much more so than employment. one way of demonstrating that is chart 9. the blue line in this graph is the difference between the growth rates of employment and investment. the spread between the two is clearly correlated with uncertainty and, in that context, the fact that employment growth has held up much better than investment in the past year or so is less surprising. what the generic relationship in [ 1 ] tells you ( as even the dictum that one “ marries in haste [ only to