Unlocking Opportunities for Growth: How to Profit from Uncertainty While Limiting Your Risk

Appendix A. The Underpinnings of the EVS Software

Adrian Becker

Origins of the EVS Approach

Real options valuation as it has existed in recent years has become a byproduct of the following two tools:

• Decision Tree Analysis—Where there are discrete points in time when we gain additional information about our underlying value opportunities.

• Financial Option Valuation—Where assumptions on the absence of arbitrage and market completeness allow us to disregard any need to risk-adjust cash flows; additionally in financial markets there is justification for modeling underlying assets as well behaved random processes which can be calibrated with historical data.

The key to real option valuation is to recognize how the fact that changing information ...