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Real Options in Practice
Book

Real Options in Practice

Marion A. Brach
Wiley, 2003
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Editorial Rating

8

Qualities

  • Innovative
  • Applicable

Recommendation

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, getAbstract.com recommends this book highly. It shows why there is more to management decisions than many managers may have heretofore considered.

Summary

Real Options and Financial Options

To understand the subject of real options, you need to understand something about financial options. An option is a choice. One who buys a financial option or a currency option or an option on real estate buys the right to choose. The purchaser of a call option on a stock pays for the right to buy the stock at a stipulated price, called the strike price or exercise price. When the market price of the stock is far below the strike price, the option is said to be "out of the money." When the market price moves above the strike price, the option is "in the money." The option price varies depending on how far in or out of the money the option is. Generally speaking, the closer an option is to being in the money, the higher the price.

So the value of the option depends on the value of its underlying security or investment. But the value of the underlying asset is not constant. Stock prices, land prices and currency prices all change over time. Dramatic changes may occur in currency or stock prices from minute to minute or hour to hour. Land prices may change more slowly. But change - the volatility of prices - is an important concept in...

About the Author

Marion A. Brach, M.D., M.B.A., is a polymath. She began her career as a medical doctor, and later took an M.B.A. from Manchester Business School, and developed an expertise in real options analysis. She speaks frequently at seminars.

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