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Real Options

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Real Options

A Practitioner's Guide

Thomson Texere,

15 min read
10 take-aways
Audio & text

What's inside?

Even if you are mathematically challenged, you owe it to your company to explore ROA.

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Editorial Rating



  • Innovative
  • Applicable


The phrase, "stochastic differential equations" may not trip off your tongue and you may not initially see the joy of learning that replicating portfolio value = mV + B. Yet Tom Copeland and Vladimir Antikarov guarantee that their book is a practical, everyman’s guide to the sometimes serious math world of Real Options Analysis (ROA). Thanks to the availability of personal computers and modeling software, everyone can now use ROA. Before PCs, only doctoral students of finance or economics would have been safe attempting it. Sure, ROA is harder than the traditional valuation methods or Net Present Value (NPV), but real options allow you to understand the full value of an asset by taking into account the factors of flexibility, risk and uncertainty. Company case models, the theory behind ROA and equations are all showcased in the book. This can be a challenging text, but strongly recommends it to all CFOs and anyone charged with evaluating business strategies.


Real Options Analysis

Managers who use Real Options Analysis will find that it’s a more effective resource than the traditional budgeting method of Net Present Value or NPV. Company accountants who use NPV are only calculating the worth of the company by using expected cash. The assumption behind NPV is that the company will always have a clean route to your next destination without detours, traffic jams or bad weather. Seasoned decision makers have had their share of bad weather and the unexpected. That’s why they’ve become more suspicious of using NPV and are looking at ROA as an alternative method of financing and planning.

The goal in instructing any manager in Real Options Analysis (ROA) is to enable him or her to complete a valuation problem from beginning to end and understand the results. Managers who have access to widely available computer software can complete an ROA, which over time will become a friend to practitioners.

Origins of Real Options

Economists Robert Merton, Fischer Black and Myron Scholes created the idea of ROA in the 1970s and later won the Nobel Prize for their work. Unfortunately, when the idea first surfaced, it required ...

About the Authors

Tom Copeland is the managing director of Corporate Finance at Monitor Group. He is the co-author of Valuation, Financial Theory and Corporate Policy, and Managerial Finance. Vladimir Antikarov joined Monitor Group in 1992. With Copeland, he has developed methodologies and led the building of software tools to apply real options in the management of R & D, product development, foreign investment analysis, investment in switching capacity and other applications.

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