Dan Zoppo, finance professional and expert Analytica user, gave a talk about the simple yet flexible and powerful Least Squares Monte Carlo method. This talk discussed what real options are, why we should be interested in them, and how to solve real options problems in practice. Also, Dan kindly shared his Analytica model and slides on his blog, Freehold Finance.
Real options represent managerial decisions and operational flexibilities that can contribute significant value to a business in response to market and operational uncertainties that unfold over time. While finance academics have long promoted real options analysis as superior to static discounted cash flow analysis it is only with the advent of modern computing and algorithms that real options can take their place in the finance and decision professional’s toolkit. This method is an approximate dynamic programming approach that has been used to value a diverse range of assets including natural resource investments, energy generation and storage assets, pharmaceutical R&D, and real estate.