Real Options in Practice

Beschreibung

Explores real option theory applied in practice Real options are quickly becoming the valuation anddecision-making method of choice for many companies, including oiland gas companies, utilities and natural resource companies,pharmaceutical and biotech companies, Internet companies, and manyothers. Real Options in Practice allows readers to viewthe world of real options from the vantage point of a corporatepractitioner applying real option valuation techniques on a regularbasis. Expert Marion Brach describes the challenges of implementinga real option framework in practice within a corporate setting.Touching on the real options most firms care about, RealOptions in Practice identifies the classic types of realoptions-deferral, abandonment, switching, expansion, andcompound-and explores the main concepts critical to understandingreal option theory. Through Brach's own three-step real optionvaluation method readers will learn how the theory of real optionsis now being applied to drive better, more profitable corporatedecision-making. Marion A. Brach, MD, MBA (Hagen, Germany), has undertakenfinancial valuation of business opportunities and acquisitionsusing scenario and real option valuation in the biotech industry. Arecognized expert on real option theory and practice, Brachreceived her MBA from the Manchester Business School and frequentlyspeaks at real option seminars.

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Marion A. Brach

Themen in »Real Options in Practice«

Finance & Investments Finanz- u. Anlagewesen Institutional & Corporate Finance Institutionelle Finanzplanung Optionspreistheorie Unternehmensbewertung

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Rarely, a book of immense breadth comes along so little understoodby its publisher that it is launched as a technical manual forindustry insiders when, in fact, it is a seminal work in manyfields. Marion A. Brach, a physician with a background in medicalresearch and a deep understanding of mathematics, migrated tofinance. She took an interest in real options, which is the fieldof valuation of choices in the real as opposed to the financialworld and in due course produced her book. Dr. Brach's interest is, at its core, whether X corporationshould buy Y corporation or invest a known amount of money in aproject. This sort of thing has usually been handled by discountedcash flow analysis. If Y can add a known amount of money to X'sbusiness, then the purchase price of Y must not exceed thediscounted cash flow it brings in. What's wrong with discounted cash flow is that it ignores risk,as Dr. Brach points out.That's a huge gap and one which realoptions can fix. The corrective value of real options pricing is obvious. Thedownside of real options is that it takes a good deal of math,usually partial differential equations, to do it. Financialcalculators are alr eady available at modest prices to handle theBlack-Scholes model of options pricing, but real options thatinvolve corporate planning require a deeper sense of what the mathis about. As Dr. Brach points out, a model for a deterministicsolution, such as how much to pay for a right to buy a whatcontract that will expire at a known price, zero, at a given time,is different from the situation of a process that has a stochasticor even randomized outcome. Dr. Brach moves her story and analysis from biblical accounts ofgrain trading and a developing and parallel options market andJoseph's choice of whether to save grain to guard against sevenyears of famine. Thales, the Greek philosopher, bought call optionson olive presses well before a harvest and was able to raise pressrents at the small cost of the options he bought. The story of the development of real options moves from Greekolives to Dutch tulips and then to theories of thermodynamics. Dr.Brach mentions the roots of real options analysis in Russian andFrench investigations of probability theory, the use of Brownianmotion as a foundation for stochastic theories of where prices willbe in successive periods, and assumptions about market clearing andinterest rates. There are investigations of the value of learning and thereduction of noise, the applications of game theory to outcomeanalysis, and a consideration of where real options is going andwhere its usefulness may end. The strength of the book is itssweeping view of the field of the valuation of events, the clarityof Dr. Brach's writing, a fine19 page bibliography, and her abilityto tell her story without delving into mathematical physics - thesource of much of the analytic power of real options analysis. For the investor, this value of this book about the analysis ofnon-financial options is what it says about the limitations ofconventional investigations of future financial events. Forthoughtful folks not concerned about figuring out the price of afinancial options, Dr. Brach provides a glimpse of analysis as itwill likely be in a decade or two. This reviewer cannot recommendthis book too highly. For a reader with a little calculus and somestatistics, it's not hard reading. For anyone, it is an adventurewith a very bright mind-- Toronto Globe & Mail
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