Real Options in Practice

Customer Reviews

The strengths of the book include an excellent foundation in financial option theory, a good explanation of the Black Scholes option model and the binomial option pricing model. There is also an excellent section on the history of options which date back to the age of the Pharaohs and the Greeks.

The author does also a good job at outlining the weakness of the Discounted Cash Flow (DCF) analysis method of valuing projects. DCF does not handle well uncertainty of projects outcome, and flexibility in management decision and investing schedule. These weaknesses are just where real options excel. One counterintuitive variable is that uncertainty, that corporate managers traditionally dislike, lowers the value of a project in DCF, but actually increases it in a real options framework. This is not so strange when you consider that volatility is the main driver of options values within the Black Scholes model.

The overall weakness of this book is that many examples are not so well explained from a mathematical standpoint. You are often left wanting more explanations to truly become comfortable using these techniques.

The experienced real option practitioner will find this book very interesting. The novice who wants to build a practical foundation better turn to "Real Options" written by Martha Amram and Nalin Kulatilaka which does a better job at explaining the underlying basic calculations behind each examples.

Similar Products