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Real Options in Practice
ISBN: 0471263087     Date Published: 2002-11-08     Author(s): Marion A. Brach
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Hardcover
Wiley
320 Pages
 
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06/20/2013 01:32:44
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Editorial Review - Book Description:
Rarely, a book of immense breadth comes along so little understood by its publisher that it is launched as a technical manual for industry insiders when, in fact, it is a seminal work in many fields. Marion A. Brach, a physician with a background in medical research and a deep understanding of mathematics, migrated to finance. She took an interest in real options, which is the field of valuation of choices in the real as opposed to the financial world and in due course produced her book.

Dr. Brach`s interest is, at its core, whether X corporation should buy Y corporation or invest a known amount of money in a project. This sort of thing has usually been handled by discounted cash flow analysis. If Y can add a known amount of money to X`s business, then the purchase price of Y must not exceed the discounted cash flow it brings in.

What`s wrong with discounted cash flow is that it ignores risk, as Dr. Brach points out.That`s a huge gap and one which real options can fix.

The corrective value of real options pricing is obvious. The downside of real options is that it takes a good deal of math, usually partial differential equations, to do it. Financial calculators are alr eady available at modest prices to handle the Black-Scholes model of options pricing, but real options that involve corporate planning require a deeper sense of what the math is about. As Dr. Brach points out, a model for a deterministic solution, such as how much to pay for a right to buy a what contract that will expire at a known price, zero, at a given time, is different from the situation of a process that has a stochastic or even randomized outcome.

Dr. Brach moves her story and analysis from biblical accounts of grain trading and a developing and parallel options market and Joseph`s choice of whether to save grain to guard against seven years of famine. Thales, the Greek philosopher, bought call options on olive presses well before a harvest and was able to raise press rents at the small cost of the options he bought.

The story of the development of real options moves from Greek olives to Dutch tulips and then to theories of thermodynamics. Dr. Brach mentions the roots of real options analysis in Russian and French investigations of probability theory, the use of Brownian motion as a foundation for stochastic theories of where prices will be in successive periods, and assumptions about market clearing and interest rates.

There are investigations of the value of learning and the reduction of noise, the applications of game theory to outcome analysis, and a consideration of where real options is going and where its usefulness may end. The strength of the book is its sweeping view of the field of the valuation of events, the clarity of Dr. Brach`s writing, a fine19 page bibliography, and her ability to tell her story without delving into mathematical physics - the source of much of the analytic power of real options analysis.

For the investor, this value of this book about the analysis of non-financial options is what it says about the limitations of conventional investigations of future financial events. For thoughtful folks not concerned about figuring out the price of a financial options, Dr. Brach provides a glimpse of analysis as it will likely be in a decade or two. This reviewer cannot recommend this book too highly. For a reader with a little calculus and some statistics, it`s not hard reading. For anyone, it is an adventure with a very bright mind-- Toronto Globe & Mail

 
Customer Review:
Total Reviews: (6)
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3 of 3 People found the following review helpful.

I would not recommend it and suggest to research the author, July 29, 2004 ByCarlo Arioli (Italy) - See all my reviews This review is from: Real Options in Practice (Hardcover) I've dealt with many books about Real Options (Mun, Copeland, Trigerorgis, ecc): all were different in style and content but defintely better than this. I do not like this one at all nor I would recommend it. Particularly, this book contains a solution methodology that is not well explained and that I could not back up with solid theoric foundations. After long and careful research on the topic, I've never seen it replicated elsewhere. To me, but I might be wrong, it was even a little bit contradictory with respect to other statements in the book and other sources. Trying to be objective, my wise suggestion in this particular case (though valid in general) would be to really do in advance some research job on the web about the author's scientific merits and her career achievements before committing to the book: I did only after buying and reading, but this proved to be a bad choice for me.
 
3 of 3 People found the following review helpful.

Disappointment, April 25, 2004 ByJakub Valkoun (Prague, Czech Republic) - See all my reviews This review is from: Real Options in Practice (Hardcover) I was really excited when I bought this book since I needed a guide on "real" approach in evaluating real options. This book is definitely different from any other book on the issue of real options on the market. It deals with some very interesting concepts such as that volatility is not always profitable in real options. There, Brach bases her work on Huchzermeier and Loch but unfortunately is rather unconvincing in her explanation. However I got really frustrated, when I tried solving some of her examples of valuating options. They are marred by numerous simple algebraic errors, making the whole example useless. (e.g. p. 99 fig. 3.21 - values of the stage options are incorrect) As one of the previous reviewers had noted, Brach doesn't seem very confident with her maths and many of her examples are incomplete and hard to follow. In short, if you want to read something "easy" and interesting about real options then this is your choice. However, don't...
 
2 of 2 People found the following review helpful.

Good overview but the editor was asleep, April 25, 2004 ByDonald Harer (Elmhurst, IL United States) - See all my reviews This review is from: Real Options in Practice (Hardcover) Brach covers the theory sufficiently; however, her attempts to apply the threory to practical examples is weak at best. Three problems became major distractions for me and ultimately led to my not completing the book. First, examples cited within the book are very difficult to follow. Fairly important components of example equations fall from the sky with little explantion as to how they were determined. Second, there are inconsistencies between stated assumptions and mathmatical examples. This particular distraction is evident in the discount rates cited and used for calculations. Third, (I may be mistaken) but there may be variations in option valuing approaches that contradict Brach's methodology. By not addressing these variations ultimately leads the attentative reader to numerous unanswered questions.Overall, it is a nice book that addresses the overall mechanics in an understandable fashion...even considering the problems with the examples. However, for those wishing...
 
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