Question

Explain how real options how can be used to inform decisions to reduce the impact of exogenous shocks on the enterprise

Answer 1

Real option term is used in finance as management decision making related in business uncertainty ,it is a choice being available to the manager related to business opportunities. it is a right otherwise than a obligation to undertake certain course of business activities being as deferring, expanding, abandoning, staging, or contracting a capital investment project.When we sale business investment in this term it is called as real put and if we buy by course of such action it is termed as real call.These are not traded as underlying financial option as securities rather through perception of management managerial action decides or can change investment project's value. it is the management who has through entrepreneurship have to create or discover such real option based on his rational and assumptions.How ever there is some resemblance between financial option and real option based modelling and analysis  should be applied here also.It is a tool of strategic management for making decision and taking inference.

It can reduce the impact of exogenous shocks on the enterprise as follows;

• It permits evaluation of synergy effects of an investment in uncertain conditions as alternative best strategy through cause and effect and market assumptions analysis. This technique is much useful in R& D Projects.
• It help in in Budgeting in ,prevailing conditions like production scale etc.
• In fears competitive it provide several options so as to identify several factors and anticipate results and thereby it enable it to take managerial decisions in advance like in business negotiation make or buy decisions, expand or shutdown entity etc
• It consider option pricing theory to evaluate projects as an approach to capital budgeting.
• It also considers additional information as value in waiting as an impact on the success of project.and that could turn as an safeguard in uncertainty.
• It provides most flexibility to alter decisions upon arising of new information by evaluating investment opportunities more systematically.
• By postponing an investment project as an investment timing option a new information can be obtained to prevent interest of business.
• As a tool of real option financial option can be used to curb volatility in prices as hedging discretion to protect business interest or to explore pricing advantage.
• It enable to anticipate better valuation of business assets and liabilities and restructuring of business process and construction.
• It fairly provide discretion to explore taxation and interest rate advantages to curb business losses or enhance business profits.
• Business cycle can be examined with relevance to growth decline and maturity analysis through which strategic decisions can be taken against uncertain market forces.
• Dividend policy can be critically analysed with respect to growth or market expectation or such other impacting factors in a competitive environment to cut down financial burdens or to explore finance in condition of need.
• For making financial arrangement on cheap alternative basis and to cut down cost of debt to curb business shocks.
• For better management of Forex in highly volatile market to absorbs price fluctuations etc