Real Options Analysis Course
Business Cases and Software Applications
JOHNATHAN MUN

CHAPTER 1
Installing the Software 1
Installing Crystal Ball Monte Carlo
Simulation Software 1
Installing Real Options Analysis Toolkit Software 8
CHAPTER 2
Getting Started with the Software 15
Getting Started with Crystal Ball Software 15
Getting Started with Real Options Analysis
Toolkit Software 22
CHAPTER 3
Framing Real Options 39
Step 1: Qualify List of Projects and Strategies 40
Step 2: Forecast Base-Case Variables for Each Project 41
Step 3: Create Static DCF Models for Each Case 42
Step 4: Monte Carlo Simulation—DCF Outputs Become
Real Options Inputs 43
Step 5: Framing the Real Options 46
Step 6: Options Analytics, Simulation,
and Optimization 54
Step 7: Reports, Presentations, and Update Analysis 55
CHAPTER 4
The Basics of Financial Modeling 57
Financial Analysis 57
Monte Carlo Simulation 61
Volatility Estimates 64
CHAPTER 5
The Basics of Real Options 73
Binomial Lattices 73
Granularities in Lattices 77
State-Pricing Approach to Solving a European Option 88
Trinomial Lattices and American Options 90
CHAPTER 6
Real Options Business Cases 95
Option to Abandon 95
Option to Expand 105
Option to Contract 117
Option to Choose 126
Compound Options 136
Closed-Form Compound Options 144
Sequential Compound Option 148
Changing Costs 154
Changing Volatility 158
Option to Contract and Abandon 162
Basic Black-Scholes with Dividends 167
Barrier Options 171
Stochastic Timing Options 175
Switching Option 178
Closed-Form Equations and Binomial Convergence 183
Nonrecombining Lattices 189
CHAPTER 7
Extended Problems: Combining Forecasting, DCF Modeling,
Real Options, and Optimization 201
CHAPTER 8
Exercise Solutions 213
CHAPTER 9
Real Options Analysis Toolkit Software Function
Description for Excel 239
x CONTENTS
CHAPTER 10
Real Options Tables 251
Real Options Value Tables 251
Implied Volatility Tables 266
Dividend Impact Tables 272
APPENDIX
Case Studies 281
More, Faster, Cheaper—The Siren Call
of Upstream R&D 281
Real Options Analysis Applied to Valuing
Start-Up Entities: The Digital News, Inc. 284
INDEX 295