Haas Biotech Club, Haas Finance Club and 
The Lester Center for Entrepreneurship 
are very proud to present


Martha Amram? 

"What's Real About Real Options" 


Tuesday April 24th 2001
6:30 PM
Wells Fargo Room
Haas School of Business
UC Berkeley


Refreshments will be served
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------------------------------------------------------------------  About the 
talk  By Jacob Sagi, Assistant Professor of Finance, Haas School of Business

 Martha Amram is one of the leading advocates of the real options approach to 
asset  valuation. The methodology originated as an economically sound way to  
calculate the value of an asset whose management requires sequential  
decision-making. For instance, a pharmaceutical company may wish to assess  
the value of a speculative research project that, after many stages, may  
result in a marketable drug. At each stage the company can decide to proceed  
along a number of routes: abandoning the project, moth balling it, or  
continuing on a variety of scales. Roughly speaking, the real options  
approach selects, from among a universe of possible sequential decision  
strategies, a single strategy that maximizes the present value of cash  
flows. The cash flows for each strategy are discounted for the risk that the  
strategy reflects and not by an ad hoc cost of capital discount factor.

A real options approach to valuation is especially useful when one is trying  
to decide whether to defer investment in a project (analogous to deciding  
whether an American Call option should be exercised), or when an asset  
embodies latent value due to future growth possibilities (e.g., internet  
firms). Although academicians have long been proponents of the technique,  
there is still a great deal of skepticism among practitioners. This is  
largely due to the fact that "optimal" decisions reached via a real options  
approach are sensitive to input variables that are not always known reliably  
(e.g., the probability that a drug will be deemed successful in human  
trials). Regardless, a growing number of firms are opting for the  
methodology. This is evidenced by an increase in the number of consulting  
firms who employ or specialize in real options analyses.

Tuesday's speaker, Martha Amram, is the author of an important book on the  
subject, "Real Options: Managing Strategic Investments in an Uncertain  
World," as well as recent articles in the Journal of Business Strategy,  
Harvard Business Review and Journal of Applied Corporate Finance. She has  
extensive consulting experience and is frequently invited to speak on the  
subject of real options. Although some in the business community have  
recently branded real options valuations a fad, academicians, like myself,  
would contend that the methodology is an important tool that is here to  
stay. I therefore encourage all students to come to the talk and learn more  
about the advantages and disadvantages of this much-talked-about concept. 
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