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Real Options Valuation

Excel real options valuation template for quantifying strategic opportunities

The Excel Real Options Valuation Template brings together a collection of option valuation tools geared to quantify strategic value from uncertainty and risks in investment timing and economic environment dynamics. Real options valuation differs from the traditional discounted cash flow approach to valuation by quantifying assumptions based on the volatility of underlying cash flows of an investment or business. The Excel Real Options Valuation template provides analytical tools based on modified option pricing theory to evaluate investment strategy alternatives and estimate the value of undertaking them.

Key features of the Excel Real Options Valuation template include:
  • Input flow is assisted with information on each Real Options Valuation theory and detailed explanations for ease of interpretation.
  • The 'Quick Start' menu provides information for choosing the correct Real Options Valuation tool for the investment decision and associated opportunity to be analyzed and quantified.
  • The modified Black Scholes option pricing model is available to value the options to delay, expand, or abandon investment projects. Modifications to the traditional Black Scholes model include the accounting of dividends or cash flows from the underlying asset and the ability to exercise the option before the time in which the opportunity is expected to expire.
  • The Binomial tree option valuation model allows the creation of unlimited binomial option branches to evaluate complex strategic options with multiple critical decision stages. New binomial branch values flow back through the entire to the starting node.
  • The Game Theory model based on the Nash equilibrium theory is provided to determine the optimal strategy as a leader, follower or entering the market simultaneously in a competitive environment. Game theory analysis is suitable for evaluating market entry timing for new products or businesses.
  • Categorized investment and/or industry risk profiles are provided and can be modified to utilize across Real Options Valuation models as a proxy for risk assumptions. Applying standardized risk assumptions across multiple option valuations not only accelerates the analytical process but also provides a common benchmark for comparing business strategies.
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- Excel 97-2013
- Excel 2004, 2011 or 2016
USD 26.00
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(Download updated on 2015-04-27)
User Guide

Real Options Model Selection

The model selection menu provides a summary of each real options valuation tool with information on its application to strategic decision making. The Black-Scholes option valuation model is modified to allow for early exercise and periodic cash flows or dividends coming from the investment. Modified Black-Scholes model are available to value delaying a proposed investment project, expanding and existing project and abandoning an ongoing project. The binomial option valuation model is suitable for complex options that have multiple binary branches with positive and negative outcomes and associated probabilities. While each binomial branch represents a real option, the valuation flows back to the original node. The game theory model applies to competitive environments to value marketing strategies for whether or not to enter a market initially or follow the competition under the Nash equilibrium theory.

Modified Black-Scholes Models

Each of the modified Black-Scholes real option valuation models presents an input window specific to each case for, delaying, expanding or abandoning projects. Alternative assumptions can be used for some of the parameters that update fields accordingly. The volatility of the investment project cash flow can be entered manually, where similar project data is available, or estimated by using an industry average from publicly traded securities. Industry values can be updated in separately provided sheet and serve as proxies for risk quantification across all real option valuation models. The results of the valuation are displayed with textual explanations for ease of understanding and decision making. Help icons further explain input logic and results metrics such as sensitivities calculated by the option Greeks.

Binomial Real Options Valuation

The binomial options valuation models allows the creation unlimited branches to value outcomes at various stages of an investment project. The application of multiple stage option valuation follows the logic of a what-if type analysis where by each node of the binomial tree represents two possible outcomes from a situation which have opposite effects. The probabilities of the upward and downward outcomes have a product of 1 but can have different magnitudes depending on the volatility of underlying cash flows. The input window with associated help information assists with the creation of binomial branches; however once branches are added, the assumptions can be modified directly in the input cells. Binomial branches can also be deleted whereby all branches are removed from a selected node.

Game Theory Option Valuation

The game theory model in the Excel real options valuation template uses a recursive algorithm to fins the points where a leader and follower enter a competitive market. Help is provided for each of the required input cells as well as the calculated values in order to understand the dynamics of game theory under the Nash equilibrium theory. The resulting options valuation is compared to a sensitivity table to accurately summarize the resulting decision on whether to enter the market as a leader, follower or simultaneously. Payoffs attributable to each party are presented as an indication of value to both the proposed project and the competitors.
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