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Our Approach, Tools & Methodologies 

Strategic Real Options Valuation™

Strategic Real Options Valuation (S-ROV™) lies at the heart of our advisory work at the Real Options Group.  This multi-stage management process, involving problem structuring, evaluation, and implementation stages, enables us to value a business taking account of its embedded strategic options that drive its potential for growth. S-ROV™ builds on and goes beyond a standard Discounted Cash Flow (DCF) analysis by identifying, modeling and valuing the embedded strategic options, giving managers a deeper insight into their company's true worth. Problem structuring involves identifying the main business uncertainties and value drivers as well as the precise structure of the embedded options and their interrelationships. The valuation stage starts by confirming the DCF analysis on each of the company's projects, assuming that investment decisions are committed. This gives the base DCF value of the company deriving from the expected cash flows arising from its existing operations (assuming no further growth).  The next step is to perform a strategic analysis of the company’s growth potential to identify its embedded growth options based on management’s strategic plans.  Using ROG Software (ROGS) the client can design and visualize the basic structure of the problem by laying out the available main strategic options in a graphical decision-tree like "option map”.  ROGS can help determine the 'expanded' or total value of the company, accounting for its full growth potential when managers have the flexibility to capitalize on the options available to them. Finally, we can compare the results of our internal bottom-up options analysis with an external, market-driven analysis of the company using our market data-driven statistical tool, ROSA. This helps identify whether the growth potential of the business is consistent with the level of uncertainty and other factors it faces in its sector.

Real Options Security Analysis (ROSA)™

The Real Options Group has developed a market valuation and security analysis tool known as Real Options Security Analysis. ROSA™  is a market data-based statistical methodology which can be used to advise on stock selection or portfolio management. ROSA uses proprietary statistical analysis to identify companies or products whose growth potential is not properly priced in by the market or is out of balance with the company’s product portfolio mix or with its main competitors in its industry given their level of volatility and other key option-based characteristics.  ROSA uses recent market data on option-related variables such as firm-specific and market volatility, an index of managerial flexibility or asymmetry of returns, the company’s degree of R&D and CapEx  etc. to determine a firm’s (or product’s) growth option potential and its % mispricing. ROSA is best used as an efficient screening devise or as a complementary tool used jointly with S-ROV fundamental option analysis and the ROG software based on an in-depth understanding of management’s strategic plans and growth options.

Real Options Graphical Software (ROGS)

ROG’s key tool for problem structuring and Real Option Valuation is its revolutionary software platform, Real Options Graphical Software. ROGS is a graphical, modular, user-friendly software that is well suited for structuring the problem’s contingent decisions and interrelated options via an “option map” and providing accurate valuation results regardless of the complexity of the problem. Its modular and flexible design allows modeling complex problems of almost any structure. It can handle a large number of uncertain variables (value drivers), any number or type of optionalities, and alternative stochastic processes (random walk, mean reversion etc). It also has an embedded simulation capability so a problem can be solved in several alternative ways methodologically. Its outputs include representation of the problem as an option map, determination of total project (or company) value inclusive of options (expanded NPV), a breakdown of total value by option source or stage, a ranking of the impact on project value of key value drivers, sensitivity to key input parameters, a risk profile (with below-breakeven probability), and optimal investment guidelines (critical trigger values for when to exercise).