Real Options Analysis: Tools and Techniques for Valuing Strategic Investments and Decisions

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John Wiley & Sons, Oct 3, 2002 - Business & Economics - 386 pages
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Cutting-edge information on the valuation and application of real options
Most investors and risk managers are familiar with financial options. But the real option structure is embedded in billions of dollars of stocks traded every day, and in billions of dollars of strategic or investment decisions made by many companies. Real options are a useful tool to guide a firm's strategic planning, and can create or enhance a firm's value.
Real Options Analysis provides a revolutionary approach to evaluating and valuing capital investment strategies by taking into consideration the real options inherent in the strategic decision-making process. This book provides readers with a qualitative and quantitative description of real options, the methods used in solving real options, why and when they are used, and the applicability of these methods in decision-making. In addition, multiple business cases and real-life scenarios are discussed. This includes presenting and framing the problems, as well as the introduction of a stepwise quantitative process developed by the author for solving these problems using the different methodologies inherent in real options-with the assistance of Real Options software powered by Crystal Ball(TM), which is included on the companion CD-ROM. With technical presentations of models and approaches backed by theoretical and mathematical justifications, Real Options Analysis is one of the most comprehensive guides available on real options.
 

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Contents

CHAPTER SUMMARIES
3
A NEW PARADIGM?
9
Appendix 1A The Timken Company on Real Options
33
Appendix 1C Intellectual Property Economics on Real Options
42
Appendix 1D Gemplus on Real Options in HighTech RD
49
Traditional Valuation Approaches
55
Appendix 2A Financial Statement Analysis
67
Appendix 2B Discount Rate versus RiskFree Rate
74
Appendix 7F Reality Checks
220
Appendix 7H Trinomial Lattices
230
Advanced Options Problems
241
Appendix 8A Stochastic Processes
257
Appendix 8C Exotic Options Formulae
263
Real Options Analysis Toolkit Software CDROM
277
Appendix 9A Real Options Analysis Toolkits Function
293
Appendix 9B Getting Started with Crystal Ball Monte
305

The Real Options Process
93
Real Options Financial Options Monte Carlo
99
Appendix 5A Financial Options
111
Appendix 5C Forecasting
124
CHAPTER SUMMARIES
135
Real Options Models
171
Appendix 7A Volatility Estimates
197
Appendix 7B BlackScholes in Action
203
Appendix 7D SingleState Static Binomial Example
210
Appendix 9C Resource Optimization Using Crystal Balls
312
BreakEven Analysis and Payback Periods
329
Summary
335
Case Studies and Problems in Real Options
345
Answers to Chapter Questions
355
Endnotes
363
Index
371
Copyright

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About the author (2002)

JOHNATHAN MUN is Vice President of Analytical Services at Decisioneering, Inc., the makers of Crystal Ball analytical software. His duties focus primarily on heading up the development of real options and financial analytics software powered by Crystal Ball. Prior to joining Decisioneering, he was a consulting manager and financial economist in the Valuation Services and Global Financial Services practice of KPMG Consulting, and a manager with the Economic Consulting Services practice at KPMG LLP. During his tenure at KPMG Consulting and at Decisioneering, he has advised, consulted, and applied real options analysis at multiple firms including Unilever, BP, Credit Suisse, Motorola, Intel, and El Paso Electric. He is also currently a visiting professor in finance, economics, and statistics at various universities, including University of Applied Sciences (Germany), Swiss School of Management (Switzerland), and Golden Gate University (California). He also provides seminars and lectures on the topics of real options, simulation and risk analysis, and corporate finance.

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