Andrew Allentuck

Saturday, April 19, 2003

Real Options Analysis Course: Business Cases and Software Applications
by Jonathan Mun
303 pages
ISBN 0-471-43001-3

Options theory addresses the valuing rights to do things under conditions of quantifiable risk. Real options lie largely in the realm of natural gas and other commodity valuation problems. In this book, incidentally, the most expensive single volume math and markets book this reviewer has ever touched, options theorist Jonathan Mun takes on the problem of valuing such exotica as the American sequential compound option using the binomial or super lattice approach and investigating the implications of boundary conditions on the two-asset correlation call option.

The disk enclosed with the book makes it possible to run these models on an Excel spreadsheet and see how they perform. The result is that, as he says, the black box mystery is explained and the mechanics of pricing become visible.

The cases examined with Excel and the Crystal Ball graphical interface include options to expand, contract, or abandon, options to choose, some variations on the Black-Scholes option pricing mechanism, all in the context of numerous simulations.

To make use of this book, one needs a background in mathematical economics and some experience in options and swaps. A PC loaded with Windows 2000 or XP, Excel 2000, XP or later, at least 75 MB hard drive space and 128 MB RAM. That will support the Crystal Ball Simulation program on the disk, the Real Options Analysis Toolkit, and the various exercises in the book.

Praise for Mr. Mun's work from others in the field is lavish. Of course, given the cost and level of preparation needed to make use of it, we'd say that only the serious need apply. Still, for the investor who wants to deal with such issues as what it may be worth to abandon a project to enlarge a factory, this is core knowledge.