In capital investing, as in life, you always have options. In today’s extremely turbulent world, managers recognize how risky the most valuable investment opportunities often are, and how useful a flexible strategy can be. That’s why they want to know all their options. Yet many current financial assessment tools fail to identify what investors can do to capitalize on future uncertain events. Martha Amram and Nalin Kulatilaka suggest a smarter new way to think about strategic investments in terms of real options. By applying options thinking–the concept behind the recent Nobel Prize-winning work on financial options–to the evaluation of nonfinancial assets, this innovative approach brings a financial market discipline to the evaluation of a company’s opportunities. Using real options theory, managers can more effectively target crucial opportunities to redeploy, delay, modify, or even abandon capital-intensive projects as events unfold. Corporate executives in finances, investments, and project management should share this book with decision makers in information technology, strategic planning, corporate restructuring, venture capital, and law. Through timely case studies, the authors show managers how to use real options to evaluate investments and create exit strategies in R&D, product design, contracts, and information technology. By linking strategic vision and tactical project decisions, Real Options helps to improve capital investment planning and results.
Editorial Reviews
Amazon.com Review
Huge payoffs in business usually entail embracing lots of risk. That’s the message of Real Options, by Martha Amram and Nalin Kulatilaka. The authors argue that standard models of evaluating strategic investments fail to consider the element of risk fully. “Uncertainty creates opportunities. Managers should welcome, not fear uncertainty,” write Amram, a California-based consultant, and Kulatilaka, a Boston University finance professor, in describing the “real options approach.” The book provides plenty of theoretical case studies, formulas, and charts that demonstrate how to shape business strategies using a system based on option-pricing. The method can value everything from undeveloped land to untried products. “With it, market leaders will understand how value is created in an uncertain environment and will know how much risk they are bearing,” the authors write.
Risk is also inherently dangerous–that’s an unintended lesson of Real Options. The two Nobel Prize-winning economists whose work serves as the foundation for this book–Robert Merton and Myron Scholes–were the brains behind Long-Term Capital Asset Management, the notorious hedge fund that was rescued under a plan engineered by the Federal Reserve. With that caveat in mind, business planners and managers should pursue Real Options with their eyes wide open. –Dan Ring
Review
“Real Options is an exciting, accessible introduction to one of the most useful innovations of modern finance. Filled with lively examples from various industries, the book reveals the strategic power of real options in business planning.”–David G. Luenberger, Professor of Engineering-Economic Systems and Operations Research, Stanford University, and author of Investment Science
“This new book by Martha Amram and Nalin Kulatilaka provides a much-needed treatment of real options theory aimed at the practitioner. It is comprehensive, highly readable, and replete with useful examples. Every corporate finance practitioner should have a copy of Real Options on hand. –Robert S. Pindyck, Mitsubishi Bank, Professor of Applied Economics, MIT Sloan School of Management, and coauthor of Investment Under Uncertainty
“Uncertainty is the greatest risk a manager faces–and provides the greatest opportunity for creating value. This book offers a way of thinking that helps managers balance the risks with potential payoffs when making decisions in an uncertain world. The real options approach is a simple yet potent method that great leaders–military, political, and economic–use implicitly. Real Options is an excellent introduction to these concepts and their applications.”–James Wall, Treasurer and Controller, AirTouch Communications
About the Author
Martha Amram is the president of Glaze Creek Partners, a consulting firm in Palo Alto, California. She frequently speaks to senior management groups and has substantial experience in the use of the real options approach for the development of business strategy. Nalin Kulatilaka is a professor of finance at Boston University’s School of Management, where he teaches primarily at the Executive MBA level. He has published widely on real options, risk management, and international finance, and has addressed executive audiences throughout the world on these topics.
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