Real Options : Managing Strategic Investment in an Uncertain World

The purpose of this text is to understand the circumstances where option methodology is applicable to strategic investment. In other words, it is a manual to teach decision-makers how to think in a real-options framework. Although the text makes reference to some option-pricing techniques, no true option-pricing training is given. However, wherever computational rigor exists, the reader is referenced to the bookÕs website: www.real-options.com for downloadable spreadsheets. The book also carefully notes the relevant academic research. The text is refreshing in that it does create a method of logic for the study of real options without an excessive amount of new vocabulary. In a sense, the method is a standardization of real-options thought. However, it is disappointing to need a second reference to actually do the computational work to ®nd the value of a real option. Although I am delighted by this textÕs contribution, I am also disappointed in that it only gives me half of what I really need to apply real-options techniques. The text consists of three parts: the real-options potential, the real-options solution process, and a portfolio of applications. A concluding chapter summarizes the text. The ®rst part has six chapters and behaves as an extended introduction. The second part, with three chapters, produces the standardized technique for implementing a real-options framework. Each of the 10 chapters in part three provides a mini case study of particular real-options techniques. More speci®cally, Chapters 1±3 introduce the concept of a real option. The reader is made aware that `uncertainty creates opportunity' and how an option-pricing framework captures this issue. Chapter 3 does a nice job of explaining option payo€s and option pricing without the aid of an equation. The presentation is clear and particularly good for a novice. Chapters 4±6 further develop the use of option techniques to real assets. Chapter 4 discusses `tracking error' in relation to using a tracking portfolio to replicate an option. Since a real option is generally not an exchange-traded security nor does it have an underlying security that is exchange-traded, the issue of tracking error is signi®cant. Chapters 5 and 6 shape the actual focus of Journal of Banking & Finance 24 (2000) 828±829 www.elsevier.com/locate/econbase