The Real Option Process Sample Clauses

The Real Option Process. The real option assumes the industry faces a high uncertainty marketing which means high risks. Xxxxxxxxx Xxx (2006) referred eight simple steps can be segregated in the real options process, which includes qualitative management screening, time-series and regression forecasting, base case net present value analysis, Monte Carlo simulation, real options problem framing, real options modelling and analysis, portfolio and resource optimization and reporting and update analysis. Figure 2.8 illustrates these eight steps of real option processes, concerning how to deal with risks. Meanwhile, these processes will be explained as follows. The qualitative management screening as the first step of process play the role of risk identification. Based on company’s goal, competitive advantage, weakness and business strategy, the management evaluates strategies and the list of projects also through qualitative screening. Time-series as a forecasting function in the process, based on project cases, apply time-series and regression analysis, using historical data to predict future risks. Subsequently, implement traditional models such as net present value (NPV), discount cash flow model to evaluate project. NPV can calculate future costs, revenues and evaluate the feasibility of project. The above three steps are mainly about traditional analysis and the fourth step is risk analysis step by using dynamic Monte Carlo simulation. The outcome data of traditional model is as inputs data into the real options analysis. The critical advantage of Monte Carlo simulation is correlated, the data is acquired from traditional analysis will be correlated by Monte Carlo, which could improve the accuracy of these data. The result of simulation is a distribution of the net present values. The real option framing is the next step. In order to mitigate risks, the managers could choose options including expand, contract, abandon, switch and restart based on the different strategies in different stages. The company has the right to implement this simulation to optimize his options. If the company has more than one project, the portfolio optimization will make asset allocation more efficiency. The final step is to report and update these analyses which could help the management make decisions to control risks.
Sample 1
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