Portfolios of Real Options, Essay Example

It would be wonderful to discuss RO application and look at the practical how to guide that covers; building scenarios from micro and macro assessment factors in the environment, frequencies of events, risks, gains and strategies preference by the financial managers. 

In view of RO application and its practicability in building scenarios from micro and macro assessment factors in the environment, it comes in handy. Arguably, the macro environment of a business can accommodate RO application in terms of guiding the activities of a company through the diverse forms of behaviors such as consumer behavior, the position and behavior of the government, and competition. Evidently, companies should be aware that some macro elements are heavily dependent on others on others such as the social and political environments cannot be separated from economic environments (Nembhard & Aktan, 2009 p. 56). The practicability of RO is evident because the economic environment can be deteriorated in the event certain conditions determined by social and political environments take place. The events that occur in most cases affect the business in terms of profits likely to be realized.

In terms of averting risks, Real Options can be applied because managers can look in to the future and prepare the company for any impending risks. For instance, considering that, financial analysts can use RO; managers can consider setting aside finances to manage a risk that a company is likely to face in the future (Raul, 2007 p. 40). Projects intended to be undertaken can equally be ceased if certain risky conditions are identified (Brosch, 2008 p. 45). Challenging events can occur from different areas and they might affect a business. RO is equally applicable in managing frequencies of events that may affect the business such as increase in prices of oil and other things such as tax, supply chain, and production among others. For instance, RO can determine when prices of oil will go up and the management may decide to buy in large volumes to avoid buying the same at high prices.

References

Brosch, R, 2008, Portfolios of Real Options, Volume 611 of Lecture Notes in Economics and Mathematical Systems, London: Springer

Nembhard, H. & Aktan, M. 2009, Real Options in Engineering Design, Operations, and Management, New York,NY: CRC Press

Raul, G. 2007, “The Case for Real Options Made Simple”, Journal of Applied Corporate Finance, (19) 7, pp. 38-49