Since standard roa draws from contingentclaims analysis based on nancial options, a key feature speci c to real assets is often ignored namely, the interplay or strategic interactions taking place among real option holders. Remember, though, that real options are not just about getting a number. It shows how these different methodologies are used in concert with one another in a comprehensive and integrated risk analysis and risk management paradigm. Applied analytics quantitative research methods9781515273677, faith journey9781515212362, quantitative research methods using risk simulator and rov bizstats software9781734497311, project economics analysis tool peat9781734481181, readings in certified quantitative risk management. A real options analysis of landfill mining projects. Hester application of real options theory to dod software acquisitions capt albert olagbemiro, usafr, jonathan mun, and mantak shing i issue 57 january 2011 vol. Real options analysis and the assumptions of the npv rule1 tom arnold assistant professor of finance e. In response to borisons article, tom copeland and vladimir antikarov argued that these two components can be evaluated in a single analysis that uses both dcf to calculate the value of the underlying asset and monte carlo simulation to estimate the volatility of the underlying, thereby expanding the range of real options applications. Real options analysis allows the firm to determine how much this safety downside.
Multicriteria analysis mca 9 establishes preferences between options by reference to an explicit set of objectives that the decisionmaking body has identified, and for which it has established measurable criteria to assess the extent to which the objectives have been achieved 10. Real option strategic decision trees analysis compiled by ted fu july 1, 2002 adapted from luenberger. The appropriate riskadjusted rate of return cost of capital is 25%. Real options analysis and the assumptions of the npv rule1.
Real option analysis example 1 a company is considering investing in a project. A primer on applying monte carlo simulation, real options. Osl risk management brings to the united kingdom and europe the certified in quantitative risk management cqrm in a joint venture with the international institute of professional education and research iiper and real option valuation inc. Potential impact of open architecture on aegis using kva and. The effect of private and public risks on oilfield. Johnathan muns most popular book is real options analysis. It characterized the possibilities of applying real options in decision planning and the ways of. Portfolio management decision support tools analysis relating to management value metrics christopher j. Applied analytics quantitative research methods9781515273677, faith journey9781515212362, quantitative research methods using risk simulator and rov bizstats software9781734497311, project economics analysis tool peat9781734481181, readings in certified quantitative risk management cqrm9781734481105, applied analytical. He received his phd in finance and economics from lehigh university.
Pdf a primer on return on investment and real options for. A north sea oil company has had much wellpublicised success valuing. The process of roa can assist in leaving investment options open, thereby enabling the investor to explore other potentially riskier possibilities. Portfolio management decision support tools analysis relating. Bhusana premanode suranaree university of technology. Naval postgraduate school california and the university of applied sciences switzerland. The effect of private and public risks on oilfield asset. Feb 17, 2006 mun demystifies real options analysis and delivers a powerful, pragmatic guide for decisionmakers and practitioners alike. As for the options analysis, the results of potential involvement of various option types such as sequential options approach are used in the valuation of a case from turkish automotive industry. Mun demystifies real options analysis and delivers a powerful, pragmatic guide for decisionmakers and practitioners alike. Real options analysis versus traditional dcf valuation in layman.
He has consulted for many fortune 500 firms from 3m, airbus, and boeing to ge and motorola and the government department of defense, state and federal agencies on risk analysis. May 02, 2020 real options analysis roa is a term in finance that primarily applies to an option to craft, dump, inflate or minimize a capital investment. The value added through optimal decision making merging decision analysis with the wellknown principles used in valuing options on financially traded assets can be further enhanced by applying an intuitive approach based on familiar concepts from the field of decision analysis. The objective probability the market will go up is 20%. Real options are not just about getting a number, they also provide a useful framework for strategic decision making. Prior to starting his own firm, he was the vice president of analytics at decisioneering, inc. It is an accurate method for estimating the value of corporate investments, and it can be effectively utilized in situations where management has flexibility in large capital budget decisions with high uncertainty. Real options analysis has become a key management tool for many of todays businesses.
This is because numerical real options analysis draws heavily on analogies with financial instruments. The book was released on may 2010 and covers four software applications. Expiration date european or american form basic options call option put option financial options real options complex options contingencies option created by some earlier action interdependencies options with interdependent values 2000. Indeed, sometimes real options have an exact value that npv will never give you. Johnathan mun provides uptodate coverage of risk analysis as it is applied within the realms of business risk analysis and offers an intuitive feel of what risk looks like, as well as the different ways of quantifying it. Real options are a complement to, not a substitute for, discounted cash flow analysis. Real options analysis an overview sciencedirect topics. We go on to demonstrate the power of realoption valuation as compared with traditional npv analysis. The present value pv of future discounted expected cash flows is either 3000 if the market goes up or 500 if the market goes down next year. Johnathan mun, is the founder and ceo of real options valuation, inc. The use of real options in strategic decision making.
Finally, there is a book that equips professionals to easily recognize, value, and seize real options in the world around them. To compute the projects static npv, carrier x first uses the binomialtree model to obtain the distribution of yield, which is denoted f i, t and given in fig. Mun is a research professor at the us naval postgraduate. Real options valuation, also often termed real options analysis, rov or roa applies option valuation techniques to capital budgeting decisions. In figure 4, the forecasting worksheet uses a sample proj ects historical revenues to forecast. Real options analysis roa is a term in finance that primarily applies to an option to craft, dump, inflate or minimize a capital investment. Johnathan mun is the author of real options analysis 3. Real options are a useful tool to guide a firms strategic planning, and can create or enhance a firms value. The valuation of localization investments with real.
Real options analysis tools and techniques for valuing strategic. Robert pindyck mit lectures on real options part i august, 2008 2 44. As readers acquire new abilities to calculate risks. To pick the best growth projects, managers need to use the two methods in tandem. Oct 03, 2002 real options are a useful tool to guide a firms strategic planning, and can create or enhance a firms value. International financial management opportunities to alter input and output prices fluctuate with exchange rate changes. Risk simulator, real options super lattice solver, modeling toolkit, and employee stock options valuation toolkit. Portfolio management decision support tools analysis.
Semantic scholar extracted view of real options analysis versus traditional dcf valuation in layman s terms dr by. Jul 06, 2010 in the second edition of analyzing and modeling risk, expert dr. Assistant professor of finance ford motor company teaching fellow. Real option strategic decision trees analysis compiled by ted fu july 1, 2002 adapted from. Johnathan mun certainly has earned the reputation of being an expert on the subject consultants, analysts, decisionmakers and engineers will be all over this. These problems include both technical problems, concerning valuation of. Johnathan mun real options analysis tools and techniques for valuing strategic investments and decisions 30. Potential impact of open architecture on aegis using kva. But the less your real option looks like a financial instrument, the harder it is to value. Framework for analyzing modular, adaptable, and flexible.
Analysis of generation y workforce motivation using multiattribute utility theory ian n. Real options analysis provides a revolutionary approach to evaluating and valuing capital investment strategies by taking into consideration the real options inherent in the strategic decisionmaking process. Potential impact of open architecture on aegis using kva and real options analysis by thomas housel and jonathan mun get pdf 715 kb. Osl risk management is part of the organisers of the european convention in quantitative methods and risk management euriskconvention, which is a 5. Books by johnathan mun author of real options analysis. Following the discussion in sections 2 real option analysis in aircraft investment, 3 case study. Applying monte carlo risk simulation, strategic real options. Far from being a replacement for dcf analysis, real options are essential complement, and a projects total value should encompass both. Heres an approach that not only makes the math of options easier but also helps you make better decisions about exercising them. Sep 20, 2002 mun demystifies real options analysis and delivers a powerful, pragmatic guide for decisionmakers and practitioners alike. A real option itself, is the rightbut not the obligationto undertake certain business initiatives, such as deferring, abandoning, expanding, staging, or contracting a capital investment project.
Real options reasoning ror is a conceptual approach to strategic investment that takes into account the value of preserving the right to make future choices under uncertain conditions. Real options can also value the ability to abandon the project if it is unsuccessful an exit option. Morton glantz, johnathan mun, in credit engineering for bankers second. Johnathan mun has 50 books on goodreads with 161 ratings. Real options analysis third edition real options valuation. Tools and techniques for valuing strategic investment and decisions, 2nd edition mun, johnathan on. It is the right but not the obligation to acquire the gross present value of expected cash flows by making an irreversible investment on or before the date the opportunity ceases to be available.
Johnathan mun, phd, is currently the ceo of real options valuation, inc. Watch a full introduction of the 4day intensive integrated risk analysis training, complete the requisite inclass work in risk identification, modelling and simulation, integrated risk management process, analytical tools, optimization, forecasting, real options analysis, and obtain the fullyaccredited certified in quantitative risk management cqrm designation offered by. The rigour of thinking about strategic decisions as real options can help you make better. The cases in the real options analysis course provide numerous examples of how the use of real options and the real options toolkit software can assist in the valuation of strategic and managerial flexibility in a variety of arenas, with many practical and useful examples. It strikes a superb balance between solid intuition, rigorous analysis, and numerous practical examples. Protectourcoastline your search result for johnathan mun. A tutorial on using excel and excel addins to value real. Tools and techniques for valuing strategic investments and decisions, new york, john wiley and sons, 2002. In the second edition of analyzing and modeling risk, expert dr. An american option allows you buy or sell the stock at any date between the present and the exercise date. Tools and techniques for valuing strategic investments and decisions find, read and cite all the research you. Modeling risk third edition real options valuation. Tools andtechniques forvaluing strategic investments and decisions. This paper analyzes the localization project, first with conventional npv analysis, then with real options analysis and finally compares the results.
Johnathan mun is the softwares creator and teaches the risk analysis, real options for analysts, risk analysis for managers, crm, and other courses. Naval postgraduate school monterey, ca and teaches executive seminars in quantitative risk analysis, decision sciences, real options, simulation, portfolio optimization, and other related concepts. Robert pindyck mit lectures on real options part i august, 2008 18 44 changes in the initial price again. With offices in north america, europe, australia, and asia, wiley is globally committed to developing and marketing print and electronic products and services for our customers professional and personal knowledge and understanding. In order to present the real options theories better the author described. Jan 02, 2012 johnathan mun, phd, is currently the ceo of real options valuation, inc. Potential impact of open architecture on aegis using kva and real options analysis. The valuation of localization investments with real options.
Through chapters on fundamental analysis and credit administration, authors morton glantz and johnathan mun teach readers how to improve their credit skills and develop logical decisionmaking processes. The main objective of multicriteria analysis is to solve. Options analysis, stochastic forecasting, and portfolio optimization. Pdf on may 7, 2015, johnathan mun and others published a primer on return on investment. Monte carlo simulation, real options analysis, knowledge.