Real Options: Managing Strategic Investment in an Uncertain World (Financial Management Association Survey and Synthesis)

it is a used book with underlines but in good condition, it is satisfying for me Real Options: Managing Strategic Investment in an Uncertain World (Financial Management Association Survey and Synthesis Series)

This is an excellent book on the subject. It is the most readable and user friendly book on the market on Real Options. You don't need to understand Greek to tackle this book unlike the other ones. The author clearly explains the Black Scholes option model, the foundation of option valuation. They then illustrate how this model can be applied to non option business investment opportunities. The authors establish a real option framework to handle your business decision. It explores many practical cases in detail, so you get a good feeling for this approach. The authors also flesh out when it is better to use Black Scholes vs. Monte Carlo simulation in order to make a business decision.

The only saving grace about this book is that it is readable. However, the reason for this is because there is not much to learn about RO from this book. The author's talk about numerous examples and the "concept" of how RO was applied. But, you will not learn the actual process of using RO, unlike Copeland's or Trigeorgis' book.

It is a good introductory book on real options targeted at the audience of managers rather than experienced financial practitioners. Its contents covered financial options, binomial pricing and Black-Scholes model where the last ten chapters or so are case studies dedicated to applications of real options where it gives readers an idea how real options can be applied in diverse industries.It makes a good and easy read for anyone who wants a quick flavor of real options without going through too much of the horrible maths that derivatives and real options seems to have !I personally enjoy reading it from cover to cover.

At last, a book about options with fewer equations than case studies of real applications. Too many other books on this vital topic concentrate on the theory which is very mathematical and arcane. This fails to reach the audience who most need Option thinking: the general manager who has to make strategic decisions in an uncertain environment. This book addreses the general manager through case studies shorn of obscure and unnecessary detail.I would recommend this book for a general audience as an introduction to option thinking. But the book is uneven in tone (though it is structured so readers can skip the less relevant parts).Its biggest weakness may be when it comes to talk about how to calculate option values. It is still to dismissive of simulation (and wrong on some technical limitations) and too attached to traditional methods such as "binomial trees" and formulae like Black Scholes.The book (perhaps uniquely in the options literature) stresses the importance of communicating results and their rationale to decision makers: if you can't explain the analysis, you won't change decision-makers minds. But traditional calculation methods are part of the problem. We need calculational methods that are transparent and provide insight not just analysis. For option thinking insight is far more important than precision.

This book is another good example of a phenomenon I call "Fad-peddling" at its worst. "Real Option Valuation" is just a fancy new name consultants-for-hire have made up to describe a set of problems economists like Dr. Pindyck have called "contingency claims" problems for years. Given the history of the two terms, I prefer "contingency claims", because of its record as a term used by economists in academic journals and because "real options" sounds too much to be like some new fad, like "reengineering" or "liberation management."Most of the other reviews are absolutely right: this book seriously lacks any quantitative explanation. No need to look for kind words; this is a serious oversight. And yes, this book does read like a long sales resentation.While the authors adequatley describe broadly how economists and financial executives solve contingency claims problems (generally using binomial methods, simulation, or partial differential equations), they don't teach any of these methods in any useful way. At best, after reading this book, you will be able to recognize whether or not your organization has any "real options".Beyond the quantitative short-comings of this book, however, there are some flawed fundamentals about their whole approach: this book treats real options as a new finance panacea for the 1990's, and suggests that the world of finance in 20 years will be a very different place because of these revolutionary ideas. Contingency claims problems are limited to a very specific set of economic phenomena with specific criteria. If the criteria are not present, contingency claims models fall apart. Consider the amount of abuse something as well-known as the black-scholes option pricing equation is subject to when it is applied to "real options valuation": the black-scholes equation is a function of two variables, primarily: time and stock price variance. When you take this equation and try to apply it to, say, the valuation of an option to market patented drug, how do you define variance and time? Time in an option contract is fixed in the contract. Variance is empirically observable from stock prices. Plus, how do we know that the value of drug patents resembles stock prices (log-normal process)? What if it is more like the behavior of a commodity (mean-reverting process)? And where are we going to get the data from anyway? In that case, the black-scholes equation needs to be abandoned and an alternative partial differential equation needs to be developed. But who is going to do that? At what cost? Obviously, at a certain point the benefits derived from exactly modelling your options is eclipsed by the cost and effort involved in doing so. The scariest part, however, happens when you realize that the greater the variance (risk) and the longer the timeframe chosen, the greater the final value of a project or investment. Now the project manager who wants to sell ice to the eskimos has the quntitative methods available to justify such a high risk project. (Just think, the project manager could sell this project to top management as a long-term investment anticipating the melting of the polar ice caps, when the price of ice in Greenland is expected to go through the roof).This book tries to reach too far, suggesting that phenomena which never should be valued as contingency claims can be valued as such. Real options (or contingency claims) are best treated as a very specialized set of quantitative techniques used to model very specific phenomena which a company may or may not be subject to see "Investment under Uncertainty" by Dixit and Pindyck for an inventory of those phenomena). Push the envelope too far and the paper tears as it does here.

I was rather disappointed by this book. I was hoping for something which could help explain to business managers why processes such as IT delivery are uncertain, and the value of delivering flexible solutions. The initial part of the book makes a lot of strong qualitative statements of exactly the right sort:- There is great value in breaking up large projects in uncertain markets- Options (flexibility) create value out of uncertain events.- Exit options which allow you to step away from a planned path, even if relatively expensive, may have significant value.- An option such as an exit option, can make an investment viable when it would fail a traditional NPV test.- Small speculative investments can enable larger investments to benefit from learning and to be much more accurately targeted.- It may create greater value to start many projects and abandon more, rather than aiming to abandon a minimum number.Unfortunately the remainder of the book then supports these statements only for a very limited set of circumstances. The Real Options approach only seems to work if the option can be translated into (or at least mapped onto) a tradeable financial security. There's no real attempt to provide tools to evaluate internal uncertainty, such as the delivery uncertainty common in IT projects, or the value of flexibility except where it maps to significant investment decisions.The book does do a good job of explaining that real world situations are non-linear, with value which changes as a result of natural volatility, over time, and as a result of one or more decisions. Traditional NPV-based approaches greatly undervalue flexibility, insurance, learning and platform investments, and can't really deal with this non-linear aspect. Simply increasing the investment discount rate, which is the usual way of dealing with such problems, doesn't bring the correct focus onto uncertainty and total risk.However, the mathematical basis for Real Option valuation is not well explained, and I found the processes difficult to follow. I suspect that the authors implicitly assumed a certain familiarity with economic and financial market techniques and terminology, which limits the value of this book to those seeking, as I was, to apply the techniques to other fields. It also left me puzzled as to why simpler approaches, such as Decision Tree techniques, can't be used instead.Surprisingly for a relatively short book the text is very repetitive, and too often turns into a blatant advert for the Real Options approach compared with others, rather than making the case on its own merits. This book provides some good ideas, and if your focus is major business-critical financial transactions it may be very useful. But I'm still looking for a good book on how to generically value flexibility.

I enjoyed reading this book and found this informative as well as practical. Excellent content, good writing style. Giving 4 stars because this is a bit dated in some areas. Still a good read.

great

I thought it could have been slightly more technical, but great to get acquainted with real options for a practitioner.

Un libro que estuve esperando debido a que es un tema que utilizaré para obtener el grado de Ingeniero Petroquímico, por lo poco que conozco del tema este libro ayudará a tener una mejor aproximación en cuanto a la toma de decisiones como una actividad primaria dentro de una empresa y ser capaz de evaluar cuando invertir, cuando salir, cuando invertir en lapsos de tiempo o cuando abandonar el proyecto.