What Is a Real Option?

Real-options analysis applies financial options theory to capital investments. Why is it a real option? It is "real" because you are investing in operating capital instead of financial capital. It is an "option" because you are investing in the right, but not the obligation, to invest.

Real options are used in situations where management has flexibility in large capital budget decisions with high uncertainty. Some examples include research and development projects, mergers and acquisitions, technology development, facility expansion, e-business project prioritization, enterprise wide risk management, business unit budgeting, licensing, contract valuation, and intangible asset valuation.

Crystal Ball is the only Microsoft® Excel®-based suite of analytical tools that includes Monte Carlo simulation, optimization, forecasting, and real options. With little effort, you can apply these advanced analytical techniques to your new or existing spreadsheets to create more accurate financial predictions and better informed business decisions.

Crystal Ball Premium Edition includes the Real Options Analysis Toolkit, so that you can apply options theory to management decision-making in situations with high levels of uncertainty. Discounted cash flow analysis estimates a project's base value, accounting for the impact of negative risk. Add real options to account for the impact of positive uncertainty in estimating your project's value.

Crystal Ball is for strategic planners, financial analysts, engineers, scientists, entrepreneurs, CPAs, marketing managers, venture capitalists, consultants, and anyone else who uses spreadsheets to forecast uncertain results. Crystal Ball is taught in the top US business schools and in universities and technical institutions throughout the world.

Advantages of using Real Options for strategic analysis include:

• Identify, value, select, and prioritize capital investments
• Gain additional insights into strategic value and management flexibility in decision-making
• Correctly value a project's total value, including its strategic intrinsic value
  
• Identify and frame strategic opportunities
• Use a reliable, repeatable, and consistent process for decision-making
• Analyze multiple decision pathways
• Incorporate new assumptions over time as opposed to the requirement of defining all assumptions at the outset for net present value (NPV) analysis
• Perform Monte Carlo simulation of risk variables, which lets you quickly run hundreds or thousands of “what-if ” scenarios and determine the probability of a given scenario happening
• Minimize the possibility of making detrimental decisions
• Value investment decisions that cannot be otherwise valued

Move beyond the academic papers and theoretical concepts, and start applying real options with this new software. ROAT 2.1 is a spreadsheet-accessible software for analyzing and calculating real options and incorporating them into custom spreadsheet models.

LEARN MORE ABOUT CRYSTAL BALL FOR REAL OPTIONS

This page offers links to a growing number of resources, including recorded Web seminars, articles, white papers, case studies, and example models. Additionally, you can view a list of common uses and examples reported directly from customers using Crystal Ball. You can also download a free trial version of Crystal Ball to see how it can help improve your business forecasts and decisions!

RECORDED WEB SEMINARS

Integrating Risk Analysis Tools in Financial Analyses With the help of an integrated financial model, this seminar will provide financial analysts with a complete understanding of why, where and how to apply spreadsheet forecasting, simulation, real options and optimization within their analyses. Presented by Crystal Campbell of Decisioneering, Inc. Recorded November 9, 2006	View recording Download files
Integrating Risk Analysis Tools in Financial Analysis Forecasting, simulation, real options and optimisation techniques are increasingly popular tools that provide Financial Analysts with analytic power beyond the traditional toolset. This web seminar is designed for both the beginner and advanced financial analyst and will fully cover the A to Z of applying risk analysis techniques. Presented by Dave Hammal, Crystal Ball Product Consultant Recorded April 26, 2007	View recording Download files
Integrating Risk Analysis Tools in Financial Analyses With the help of an integrated financial model, this seminar will provide financial analysts with a complete understanding of why, where and how to apply spreadsheet forecasting, simulation, real options and optimization within their analyses. Presented by Crystal Campbell of Decisioneering, Inc. Recorded November 9, 2006	View recording Download files
Efficient Capital Allocation in Oil & Gas: Good, Bad and Ugly Projects, and How to Tell the Difference Learn when is a project an efficient use of corporate capital, what is the Efficient Frontier, what is an appropriate measure of risk in capital project evaluation, what is the role of strategic flexibility (real options) in project evaluation and the capital allocation decision, and what effect does this flexibility have on the Efficient Frontier Presented by Steve Hoye of Decisioneering, Inc. Recorded December 7, 2006	View recording Download files
Portfolios Optimisation in Oil & Gas: An Analysis of Risk and Real Options and Their Contribution to Efficient Capital Allocation Review an optimised portfolio of capital projects and examine the sources of systematic and unsystematic risk. We will see how this can help in our funding decisions and the different impacts on the portfolio and its risk/return characteristics. Presented by Dave Hammal of Crystal Ball Recorded June 6, 2007	View recording Download files

Top

WHITE PAPERS & ARTICLES

Funding New Technology By Thoi Truong, Adjunct Faculty, Oregon Health & Science University / OGI / MST	Download
Real Options: The IT Investment Risk-Buster By Peter Boer, July 2002, Optimize Magazine Traditional financial measures just don't capture the strategic value of IT projects. Try a real-options approach for valuing them instead.	Download
Real Options, Real Opportunities By James Alleman, January 2002, Optimize Magazine Treating IT investments like stock options can lead to better product valuation, capital budgeting, and strategic planning.	Download
Real Options in Strategic Decision Making By Chris Walters and Tim Giles of London Economics Spring 2000, Tuck Paradigm (an online journal of the Amos Tuck School of Business at Dartmouth)	Download
Risk and Optimal Timing in a Real Estate Development Using Real Options Analysis By Robert Fourt, Gerald Eve	Download
Simulation and Optimization for Real Options Valuation By Barry R. Cobb and John M. Charnes (The University of Kansas)	Download
Six Applications of Real Options: Case Examples (presentation only) Thomas E. Copeland Senior Lecturer - Finance, MIT	Download
Telecommunications Network Evolution Decisions: Using Crystal Ball and OptQuest for Real Options Valuation By John M. Charnes, Barry R. Cobb, The University of Kansas School of Business	Download
Valuating Biotech Project Portfolios Using Crystal Ball and Real Options - Case: NatImmune A/S By Aaren Ekelund, Partner, IntelliGlobe Aps	Download
Valuation and Optionality of Large Energy Industry Capital Investments By Robert Graber, Vice President, EnergyPath Corporation	Download

Top

CASE STUDIES

> Analyzing Engineering Projects Analyzing Engineering Projects Using Real Options -- Intelligent Investments in the Face of Uncertainty	Download

Top

EXAMPLE MODELS

Basic American Option Detail: This model is one of three dozen models used in our Real Options training course. In this example, you can manually change input parameters on a basic American option to see how they affect the resulting real options calculation.	Download For: Crystal Ball Level: moderate-complex
Basic European Option Detail: This model is one of three dozen models used in our Real Options training course. in this example, you can manually change input parameters on a basic European option to see how they affect the resulting real options calculation.	Download For: Crystal Ball Level: moderate-complex
Trinomial Lattices Detail: This model is a downloadable spreadsheet on solving trinomial lattices. At the limit, trinomial lattice results approach the binomial lattice results, the only difference being that trinomial lattices approach convergence faster, but are more difficult to solve analytically.	Download For: Crystal Ball Level: complex

Top

COMMON USES & EXAMPLES

The following examples were provided by our customers and represent only some of the potential corporate finance applications for Crystal Ball.

• Analysis of transactions risks and opportunities
• As a teaching tool in strategic planning and financial analysis courses
• Cash Flow Valuation of Coal properties
• Determining Risk in investments in the wind power and renewable energy industries
• Exploration of equity partnerships and the involved risk and exposure
• Evaluating investment options
• Evaluation of capital investment proposals, acquisitions, and new business startups
• Feasibility studies on capital investments
• Help with complex option models for purposes of option valuation
• Option and asset pricing
• Real options analysis
• Research project modeling securities prices as real options, stock market volatility as a function of perceived human capital volatility. Behavioral finance and real options research.
• Run sensitivity analyses on business plans
• Strategic analysis
• Valuation for Business Plans
  

Top

TEXTBOOKS

Dealmaking: Using Real Options and Monte Carlo Analysis

Real Options: A Practitioner's Guide

Top