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Real Options

Course Number:



Nicola Secomandi,


Undergraduate Business


Operations Management

Course Description

Real options analysis is an approach to the management of operational assets that exploits managerial flexibility in decision-making and combines it with market-driven valuation of cash flows. This approach assumes that managers use all the available information when making decisions. It is thus particularly useful when managing projects that involve dynamic and state-contingent choices among alternatives (options), especially of a strategic nature. Examples include investing in and developing new products or technology, expanding/reducing manufacturing capacity, and suspending/resuming production. The valuation of financial options is the conceptual basis of real options management (but this course does not assume prior knowledge of this topic). Real options analysis extends this fundamental market-driven valuation approach to a much broader spectrum of business applications that feature dynamic decision-making. It thus contrasts the standard net present value rule used by static discounted cash flow analysis. The resulting managerial decisions and asset valuations can be very different when real options analysis is used rather than static discounted cash flow analysis. The course learning objectives are to (i) develop the students┬┐ ability to take an unstructured problem and implement real options analysis in a structured manner; (ii) integrate market-driven valuation and dynamic decision-making techniques into a practical, yet rigorous, business analytics toolkit; and (iii) provide examples of successful practice and applications in a variety of industries.


Lecture: 100min/wk and Recitation: 50min/wk