Real Options and Decision Analysis
Real Options Analysis has become a key management tool for many of today's businesses. It is an accurate method for estimating the value of corporate investments, and it can be effectively utilised in situations where management has flexibility in large capital budget decisions with high uncertainties. It is not an equation or sets of equations but rather, an analytical process as well as decision analysis through process.
Our Integrated Risk Management Process using Real Options Analysis is:
- A systematic and integrated decision analysis approach.
- Incorporates financial theory, economic analysis, applied decision sciences, investment finance, options theory and statistical modelling in valuing real assets rather than financial assets.
- Useful in a dynamic and uncertain business environment where business decisions must be flexible and dynamic.
- Applicable within the context of strategic decision-making, valuing and justifying investment opportunities and capital expenditures in e-commerce, e-business, IT, research and development, biotechnology, and high-tech industries.
There are 5 basic requirements to the applying Real Options
- A financial model must exist or can be built
- Uncertainty exists and is resolved through time, events and actions
- Uncertainty unfolding changes decisions and actions
- Flexibility or options must exist
- Management must be credible enough to execute options optimally
At Real Consulting, we work in full confidence, non disclosure basis with the client in structuring their strategic plans by framing the problem in a Real Options analysis framework.
We work with clients to explore feasible strategic options. Various applications include:
- Project management - availability of resources, chances of meeting timeframe, critical paths, project / R&D selection and optimisation
- Structuring M&A deals using strategic options
- Hedging downside risks (financial or operational) (option to abandon or option to contract), by when and by what price
- Capitalise on growth (option to expand), by when and by what price
- Structure business deals with 3rd parties (suppliers, marketing etc.)
- Analyse optimal timing of execution (option to defer)
- Analyse value of execution (maximum cost or price to pay)
Throughout the process, we will work jointly with the clients:
- to determine the required data, collecting the data, and determine the assumptions
- to take existing financial models or build new ones.
More importantly, we will leave behind models for the client, or train your analysts to use them. We offer first-class corporate training in risk and real options analysis. Clients can take advantage of our advanced software and training, and learn how to apply our technologies in their businesses.