Real Options (Inside Drucker: Course Showcase, Vol. 17)

In real-world corporate finance, there is a tremendous amount of flexibility in how projects roll out. Professor Jim Mills gives Drucker students a powerful, cutting-edge tool for determining which choices and opportunities add financial value to a project in his Real Options course. Let us know what you think, and check out the latest edition of Inside Drucker: The Drucker Video Magazine at http://www.insidedrucker.com.

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a lot of people don't cross option they
don't understand options
the in the traditional methodology that
we employ
in corporate finance we assume that
everything we need to know about the
investment project we know
today and we also know that once we
decided on the investment we're gonna
roll it out with these
with a certain design we're not going to
deviate from the design
the truth matters most projects don't
operate that way
we learn as we start the project we
change the priority as we get into it
so there's flexibility so what real
options analysis is tries to
value the flexibility inherent in
projects in to see whether or not that
flexibility
head screw value from a financial
perspective where within a building the
shopping center
there somebody else a third party who's
considering
billion a housing development if the
housing development goes on
is going to affect the performance of
the shopping center so now let's go back
to something we did early in the
semester
in developing the idea for tracking
powerful benefited the real options
approach
is to look any project from beginning to
end
in asked a simple question do we have
flexibility
do we have choices and if we do have
choices
win do those choices rise in what's the
nature of those choices so
if you think about strategy strategy is
all about choice
is we did pursue or we don't pursue
certain products are certain markets are
certain customs
be real options class been terms a
concept and theory is
not something that comes naturally to
most do they really have to work at it
it's a different perspective looking at
the world
students who do traditional finance
it's pretty straightforward you know and
and there's a there's a methodology we
follow the steps and we get the answer
with the real options requires a lot of
judgment lot
requires really think through and frame
into really identified the choices that
we
really help in not before sells about
the choices
in part it's an art part it's a science
in the art portion is the hardest to
learn
and that's to become a really good
practitioner is to pick up an art
to pick up those insights to really
understand what
decisions in which way so you have and
that's what makes it difficult Billups
is not easy course
I would say there's probably maybe you
buy it yes
maybe fifteen schools and united states
that actually have
courses in real option what happens in
real options analysis
using the binomial lattice approach as a
time period grows or
steps can small they actually can merge
the results conversion the black jewels
model
this is the workhorse this is what we
use more often than
miss because it is more flexible and
you'll see that flexibility
when we look at issues the deferrals
expansion contraction
conversions except for a things that
cannot be handled with black sure
I think the method should be pardoned
toolbox have any professional internet
not just financial year
but finance anybody who
whose says I me finance professional who
in their career has to do
capital budgeting should understand the
tool
what I like about the National Science
in Management Unit Crocker
is the combination I'll the courses we
teach
in the director school in the courses we
teach
in the school applied mathematics and
the point is
we have coordinated these classes for
example I teach a course on
financial derivatives which looks at who
uses the girly products how they're used
a bit about how their structure and what
the payoffs are what are the benefits
and risks
in the math department they
talk about how we model go same
instrument
so I talk about how we use 'em how we
monitor
how we measure it how we manage it they
talk about how we do the modeling
okay so it's integrated the
them
the