What Is So Real About Real Options, and Why Are They Optional? E-Book

Johnathan Mun

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Global Finance Executive Select
• Sprache: Englisch

Seitenzahl: 29

Veröffentlichungsjahr: 2011

Beschreibung

In the past, corporate investment decisions were cut and dried. Buy a new machine that is more efficient, make more products costing a certain amount, and if the benefits outweigh the costs, execute the investment. Hire a larger pool of sales associates, expand the current geographical area, and if the marginal increase in forecast sales revenues exceeds the additional salary and implementation costs, start hiring. Need a new manufacturing plant? Show that the construction costs can be recouped quickly and easily by the increase in revenues the plant will generate through new and improved products, and the initiative is approved. However, real-life business conditions are a lot more complicated. Your firm decides to go with an e-commerce strategy, but multiple strategic paths exist. Which path do you choose? What are the options you have? If you choose the wrong path, how do you get back on the right track? How do you value and prioritize the paths that exist? You are a venture capitalist firm with multiple business plans to consider. How do you value a start-up firm with no proven track record? How do you structure a mutually beneficial investment deal? What is the optimal timing to a second or third round of financing? This chapter provides a novel approach to applying real options to answering these issues and more.

Leseprobe

Contents

Cover

Title Page

Copyright

Part Seven: Risk Mitigation

CHAPTER 12: What Is So Real About Real Options, and Why Are They Optional?

WHAT ARE REAL OPTIONS?

THE REAL OPTIONS SOLUTION IN A NUTSHELL

ISSUES TO CONSIDER

IMPLEMENTING REAL OPTIONS ANALYSIS

INDUSTRY LEADERS EMBRACING REAL OPTIONS

WHAT THE EXPERTS ARE SAYING

CRITICISMS, CAVEATS, AND MISUNDERSTANDINGS IN REAL OPTIONS

QUESTIONS

Copyright © 2010 by Johnathan Mun. All rights reserved.

Disclaimer. This content is excerpted from Modeling Risk + DVD, Second Edition: Applying Monte Carlo Risk Simulation, Strategic Real Options, Stochastic Forecasting, and Portfolio Optimization, by Johnathan Mun (978-0-470-59221-2, 2010), with permission from the publisher John Wiley & Sons. You may not make any other use, or authorize others to make any other use of this excerpt, in any print or non-print format, including electronic or multimedia.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

In the past, corporate investment decisions were cut and dried. Buy a new machine that is more efficient, make more products costing a certain amount, and if the benefits outweigh the costs, execute the investment. Hire a larger pool of sales associates, expand the current geographical area, and if the marginal increase in forecast sales revenues exceeds the additional salary and implementation costs, start hiring. Need a new manufacturing plant? Show that the construction costs can be recouped quickly and easily by the increase in revenues the plant will generate through new and improved products, and the initiative is approved.

However, real-life business conditions are a lot more complicated. Your firm decides to go with an e-commerce strategy, but multiple strategic paths exist. Which path do you choose? What are the options you have? If you choose the wrong path, how do you get back on the right track? How do you value and prioritize the paths that exist? You are a venture capitalist firm with multiple business plans to consider. How do you value a start-up firm with no proven track record? How do you structure a mutually beneficial investment deal? What is the optimal timing to a second or third round of financing?

This chapter provides a novel approach to applying real options to answering these issues and more.

Derived from Mun, Johnathan. Modeling Risk + DVD, Second Edition: Applying Monte Carlo Risk Simulation, Strategic Real Options, Stochastic Forecasting, and Portfolio Optimization. Hoboken, NJ: John Wiley & Sons, 2010. 978-0-470-59221-2; 336 pp.

978-1-118-00634-4978-1-118-00633-7

Part Seven

Risk Mitigation

CHAPTER 12

What Is So Real About Real Options, and Why Are They Optional?

This chapter provides the reader a cursory look at and quick introduction to real options analysis. It explains why only running simulations, forecasting, and optimization are not sufficient in a comprehensive risk management paradigm; that is, time-series forecasting and Monte Carlo simulation are used for identifying, predicting, and quantifying