Real Options Savola
Finance 412
Dr.Eskandar Tooma
Fall 2010
Savola Sime Egypt
Case Study
Mayamine El Saady 900061728
May Farag 900060338
Marina Hanna 900060272
Amina Hussein 900061146
Introduction:
Real option analysis (ROA) is a decision-making structure that basically calculates the value of a future business decision. ROA borrows from financial options theory. A financial option gives the buyer of a financial asset the right, but not the obligation, to buy a stock or bond, for example, at a predetermined price at a future date. By analogy, a real option is a managerial decision-making tool that calculates the value of a business decision that a manager has an option, or right, but not an obligation to fulfill.
Basically, there are two types of real options Growth and Flexibility. Growth options help the company to increase its future business such as in the research and development, brand development, leasing or developing land, mergers and acquisitions and most important initiating a new technology. Flexibility options are different as they give the firm the ability to change its plan in the future and adapt to a new one. For example, the company may want to buy the option to delay, expand, contract, switch uses, outsource or abandon projects.
Real options are considered powerful analytical tools as they capture the value of managerial flexibility to adapt decisions that would help to take an action towards any unexpected market developments. Companies associate their investment portfolio by identifying, managing and exercising real options to create shareholder value. In addition to that, real options recognize the staged nature of many investments and account explicitly for the reality that certain investments will never be made, if, based on additional information developed over time, they are deemed unattractive. In such cases, it makes sense to simply abandon them rather than entering into a poor investment. In fact, real
Dr.Eskandar Tooma
Fall 2010
Savola Sime Egypt
Case Study
Mayamine El Saady 900061728
May Farag 900060338
Marina Hanna 900060272
Amina Hussein 900061146
Introduction:
Real option analysis (ROA) is a decision-making structure that basically calculates the value of a future business decision. ROA borrows from financial options theory. A financial option gives the buyer of a financial asset the right, but not the obligation, to buy a stock or bond, for example, at a predetermined price at a future date. By analogy, a real option is a managerial decision-making tool that calculates the value of a business decision that a manager has an option, or right, but not an obligation to fulfill.
Basically, there are two types of real options Growth and Flexibility. Growth options help the company to increase its future business such as in the research and development, brand development, leasing or developing land, mergers and acquisitions and most important initiating a new technology. Flexibility options are different as they give the firm the ability to change its plan in the future and adapt to a new one. For example, the company may want to buy the option to delay, expand, contract, switch uses, outsource or abandon projects.
Real options are considered powerful analytical tools as they capture the value of managerial flexibility to adapt decisions that would help to take an action towards any unexpected market developments. Companies associate their investment portfolio by identifying, managing and exercising real options to create shareholder value. In addition to that, real options recognize the staged nature of many investments and account explicitly for the reality that certain investments will never be made, if, based on additional information developed over time, they are deemed unattractive. In such cases, it makes sense to simply abandon them rather than entering into a poor investment. In fact, real