Real-options

This book attempts to expose the reader in a nontechnical manner to the new technique of evaluating investments in the New Economy characterised by volatility and uncertainty.The author does so without resorting to mathematical methods.The book is basically expository and attempts to build upon the readers'familiarity with financial options.It concentrates in describing the real options which each business decision is confronted with and demonstrates the flexibility which managers face. He views these opportunities as options even the decision not to implement the plan. This is a creative approach to understanding what real options is all about.

Dr. Boer's ideas about the economics and management of industrial R&D have had a significant impact. This novel and wonderfully written book provides a modern framework for the analysis of high-risk, high-reward endeavors which include research and development. The methodology has great intellectual appeal: it integrates real options analysis and net present value analysis, thus capturing the traits of the "new" and "old" economies in the same analytical framework. This it does in a practical, pragmatic manner, suitable to real-life problems in opportunity (and risk) management.

The Real Options Solution is a must read for anyone interested in the creation of value or wishing to understand or quantify the total value of a company. It clearly sets out why the value of any company must include the value of its business plans and the options that these afford, before going on to explain the more technical aspect of valuing such plans or options.

F.P.Boer, in the first section of this book, successfully achieves a discussion of value and its components that will satisfy anyone wishing to understand how to perform a calculation of the value of a real option, detailing what data would be required, how to build this into a total value caluclation etc. Yet the use of only a limited number of diagrams and numerical examples makes this book accessible to all, not just those interested in a text book approach, without in any way compromising the content or quality of the material provided. In the second section several topics are discussed, with numerous examples both contemporary and from history, including 1) risk, it's upside as well as downside potential and the treatment of different types of risk in valuations, 2) intellectual capital, what is and how it could be valued and 3) innovation and why this is essential to future value creation, with all issues discussed adding an important dimension to this very practical guide to value.

This is a very comprehensive text. However, make no bones about it; the prose reflects a highly technical style of writing. If you have limited knowledge about differential equations, logic, and statistics, you will struggle to stay engrossed past the first few chapters. Hard reading is an understatment. I was hoping that this would be the book that could boil down what real options are and give me a straightforward approach to their applications. Reading this I feel like I am back in an astrophysics class at MIT.

This is an excellent book. I had been initially surprised by the critical reviews for Copeland et al. and Kulatilaka et al. (Copeland, especially, has strong credentials,) but now, having looked at those books, sadly I have to agree. Then I bought this book and found a gem. The approach is fresh and we are not just presented with the same familiar textbook routes; the best part of which is that real problems are not hammered into available but inappropriate analytical solutions. The structure of the book is unusual too: 4 chapters with the foundations (including some maths but fully accessible to managers - good diagrams and plenty of intuition), 6 chapters of case studies (one, "Dixpin" by Stark, written to link with Dixit & Pindyck, the others new and based on consulting/research - nice to see non-standard cases and also more than one underlying variable!), 4 more chapters (the title of the last, "Summary for executives", speaks volumes about the authors' helpful approach, even if you're not an executive!), and 5 appendices + glossary, etc. The appendices and cases are written in the same style as the chapters of main text and the result is a very flexible resource which, I think, will be helpful for beginners, thro' 2nd year MBA and up to quite advanced practitioners.

Even when standard techniques are shown they are given innovative explanations. For example, see pages 266-269 in Newton's Appendix 4, on numerical solution, which I believe is a genuinely new way of taking the well-known mathematical relationship between the Black-Scholes partial differential equation and the heat conduction equation but explaining it using common sense appreciation of heat and temperature (amazingly, he manages to obtain the combined call option payoff and stock price diagrams using a thought experiment in heat/temperature which I could actually understand!). In this single appendix are both the intuition for understanding the evolution of option prices and the details of finite difference calculations which any reader can readily reproduce. His explanation of the random walk for beginners (Appendix 5) is the best I have ever seen (I even liked the very British story about a drunken sailor taking a random walk near Her Majesty's Royal Naval Dockyard - fortunately, the book does not often digress with funny stories, but this one helped).

I am always wary of books with many co-authors (this one has seven) but here you could believe that one author wrote the whole book. Howell is the editor and presumably the author of the chapters which are not attributed; other parts are by different combinations of the seven. All are in the Real Options Group at Manchester Business School, England (Patel is at Cambridge) and that may explain the cohesion of the text.

In many ways this book is technically ahead of the game but you can tell that these guys are at a business school rather than a conventional university department - they know how to communicate with managers as well as students.

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.

Amram and Kulatilaka have produced an excellent overview of the real options theory and practical application. The book helps recognize real options by giving lots of examples and provides with a clear description of a "four step solution proces". Yet, the book could do with a little more attention on the quants, especially in the examples. E.g. chapter 13 on Drug development states that "it was found that a drug (..) had a value of $14.6 mln using the real options approach". That's fine with me, but how exactly did you calculate that ?

This is the first Real Options book that targets the general management audience and, subsequently, is not bursting at the seams with daunting calculations and formulas that typically turn-off even the most enthusiastic readers. It recognizes that there is just as much power in developing a 'real options way of thinking' as there is in understanding the mechanics of the economic theory. Having worked for several years in product development where traditional financial treatments like NPV are extremely limited, I cannot emphasize enough the power of these frameworks. I would highly recommend this book to people who are similarly frustrated by their current managmement tools which fail to capture the nuances of the strategic decisions they face. Through its structure and frequent case examples, the book makes real options much more approachable. This increases the likelihood that decisions will actually be influenced and enhanced even in the face of significant uncertainty.

A classic text on Real Option Theory. In comparison with Mr Copelands Text on Real Options, Trigeorgis has more depths, but Mr Copelands book is easier to read, as Copeland targets practitioners. The chapter on Real Options for the analysis of competetive strategies is worth reading, and much better than Mr Copelands remarks on that topic, but possibly not fully up to date. The future of real options seems to lie in their combination with game theory, CFROI and dynamic oligopolistic markets. Mr Trigeorgis describes that field of research in its baby stage, as the book is 6 years old, but his theories are still much better, than many other books on that topic.

Real Options is the study of how to value potential business based on the real options they create rather than on discounting a simple stream of (erroneously) forecasted cash flows. Any business venture can be seen as a tangible corollary to a financial option, most commonly the Call or Put Option. For example, when Toyota and Honda build electric-fuel hybrid cars, they are not counting on an immediate stream of cash flows from hybrid car sales. Instead they are establishing a "Real" American Call Option on the ability to go to full hybrid car production ahead of the competition when the market for such vehicles manifests itself. How much they spend on their hybrid car programs is determined by finding the value of this option.

Lenos Trigeorgis shows how this is done. Conceptually, one can follow it well enough, but Lenos is merciless with the math. Still, one can grasp the basic concept by studying this book. A good read on the subject.

Trigeorgis provides a rigorous treatment of the concepts that are required to facilitate understanding of RO. In fact, a section in Chapter 2 can serve as a reference for a half-semester course in corporate financial theory. Amram's book is a disappointment. Copeland's book is a good alternative for those that seek a readable introductory RO book. However, the edition that I got had numerous errors (check the book's website for corrections). Once you familiarize yourself with the concepts, upgrade yourself to the level of Trigeorgis.

I read an article on this book before publication and was excited about getting a copy. Past works on real options analysis(ROA) have been heavy on theory, but low on application. However, as I read through this book I was disappointed in how the content was presented.

First, the good points. The book is more application-oriented than other books on the subject thus far. The book is thorough in its discussion of real options analysis, and demonstrates how to estimate volatility, which has been poorly explained by other authors. The book provides lots of case studies and examples. Finally, the methodology is simple to follow.

Now, the bad points. Enough has been written about the book's errors in other reviews. Also, the solutions should have been provided for free. The most disappointing part is the authors' claim that this is a "practitioners" guide and that ROA will eventually replace NPV in corporate valuation. If you are a financial engineer or quant-jock for an I-Bank, Consultancy or Treasury group, then it is a practitioner's guide. Otherwise, the book is written above the level of the industry financial analyst, particularly beginners. The authors' use Everett Roger's five attributes of innovation that determine its rate of adoption. One attribute is low complexity for easy understanding and implementation. This book is very complex and it's no wonder why ROA has a slow adoption rate among corporations.

Bottomline, the book needs to be rewritten properly from an editorial standpoint. More importantly, Mr. Copeland needs to decide whether he truly wants to bring ROA to the corporate masses or keep it in the hands of a few who can sell their expertise to companies

Is there a list available with all the errors in the book? Does anyone know where to get it?

Content : A
The book enables the reader to understand the world of real options without having to take a course on stochastic calculus, which is good because otherwise Real Options would be too hard to sell to management. The book is rich on examples and presents the building blocks of almost every combination imaginable. More case studies though would have been a big plus.

Presentation : F
You absolutely should not read the book without first [knowing] the corrections.... There are so many errors everywhere - in formulas, calculations and text (a total of 177 for 350 pages of relevant content !!) - that I could only shake my head in disbelief. Quite obviously, nobody has made even a half-baked attempt to proof-read the book.

I was really excited when I bought this book since I needed a guide on "real" approach in evaluating real options. This book is definitely different from any other book on the issue of real options on the market. It deals with some very interesting concepts such as that volatility is not always profitable in real options. There, Brach bases her work on Huchzermeier and Loch but unfortunately is rather unconvincing in her explanation.
However I got really frustrated, when I tried solving some of her examples of valuating options. They are marred by numerous simple algebraic errors, making the whole example useless. (e.g. p. 99 fig. 3.21 - values of the stage options are incorrect)
As one of the previous reviewers had noted, Brach doesn't seem very confident with her maths and many of her examples are incomplete and hard to follow.
In short, if you want to read something "easy" and interesting about real options then this is your choice. However, don't expect this book to be a real guide in your everyday dealing with real options.

Brach covers the theory sufficiently; however, her attempts to apply the threory to practical examples is weak at best. Three problems became major distractions for me and ultimately led to my not completing the book. First, examples cited within the book are very difficult to follow. Fairly important components of example equations fall from the sky with little explantion as to how they were determined. Second, there are inconsistencies between stated assumptions and mathmatical examples. This particular distraction is evident in the discount rates cited and used for calculations. Third, (I may be mistaken) but there may be variations in option valuing approaches that contradict Brach's methodology. By not addressing these variations ultimately leads the attentative reader to numerous unanswered questions.

Overall, it is a nice book that addresses the overall mechanics in an understandable fashion...even considering the problems with the examples. However, for those wishing the end-all-be-all real option reference book...Keep Looking.

No financial innovation of the past half-century has been more important than option analysis. The notion that option analysis could help corporate managers make more effective investment decisions was bold news in the early 1980's, but did not make much of an impact beyond rather narrow circles. Options are hard to understand - the math can be intimidating and few people have been able to explain option analysis in a way that makes sense to the financial laity. This book is, therefore, long overdue. Marion A. Brach delivers the essential logic and analytical framework of real options to any corporate manager. The text can be heavy going at times, and the author has an annoying habit of referring to examples without explaining them (footnotes cite other publications where explanations may be found). Still, we recommend this book highly. It shows why there is more to management decisions than many managers may have heretofore considered.