## Trinomial Lattices And American Options

Building and solving a trinomial lattice is similar to building and solving a binomial lattice, complete with the up down jumps and risk-neutral probabilities. However, the recombining trinomial lattice below is more complicated to build. The results stemming from a trinomial lattice are the same as those from a binomial lattice at the limit, but the lattice-building complexity is much higher for trinomial or multinomial lattices. Hence, the examples thus far have been focusing on the binomial...

## Getting Started With Real Options Analysis Toolkit Software

Click on Start, Programs, Crystal Ball, Real Options Analysis Toolkit, and select Toolkit Figure 2.16 . The toolkit main welcome screen now appears as illustrated in Figure 2.17. Make sure you select Enable Macros if prompted. The models are aggregated into three distinct categories Binomial Lattices with Closed-Form Models, Closed-Form Partial-Differential Models, and Stochastic Differential Models. The first category of models uses the binomial approach, in concert with closed-form models....

## Accessing the Functions Running Simulations and Optimization

Note Functions are only accessible in the full version of the software. If the user requires access only to the functions and results, as well as to run Monte Carlo simulation or optimization, the user should then first exit the Real Options Analysis Toolkit software by exiting Excel. Open any existing Excel spreadsheet. For instance, click on Start, Programs, Crystal Ball, Real Options Analysis Toolkit, Examples, and choose Simulation Figure 2.40 . The spreadsheet shown in Figure 2.41 appears....

## Step 5 Framing The Real Options

Now that the DCF models have been created for the projects that survived an initial management screening process, what next Which projects should undergo a real options analysis Should all projects be scrutinized this closely The answer comes in several parts Projects that are close to at-the-money or slightly in-the-money or slightly out-of-the-money will benefit most from a real options analysis. Projects that are lumped together and hard to separate or prioritize from a DCF standpoint can...

## Step 4 Monte Carlo Simulationdcf Outputs Become Real Options Inputs

In more advanced financial analysis, a highly recommended step for the real options approach is the application of Monte Carlo simulation. Based on some sensitivity analysis, the analyst decides which input variables to the DCF model previously constructed are most vulnerable to risks and sudden exogenous and systemic shocks. A powerful tool for calculating static sensitivities is the use of a Tornado Diagram in Crystal Ball, as seen in Figure 3.5. Using historical data, the analyst can take...

## Installing Real Options Analysis Toolkit Software

I recommend that you install the Crystal Ball software before installing the Real Options Analysis Toolkit, and that you exit all other programs before starting the installation process. To start the installation process, browse the contents of the CD-ROM. Open the Real Options Software folder and double-click on the setup.exe file Figure 1.16 . You need to have administrative rights before you can install the software. Please see an IT professional if you are unsure if you have these rights on...

## Getting Started With Crystal Ball Software

The following exercise helps you get started using the Crystal Ball Monte Carlo simulation software. Start by opening an example spreadsheet. Click on Start, Programs, Crystal Ball, and choose Examples Figure 2.1 . The software comes with multiple sample Excel spreadsheets. Double-click on Magazine Sales.xls to start the example shown in Figure 2.2. The Crystal Ball splash screen in Figure 2.3 should appear momentarily. FIGURE 2.1 Location of the Crystal Ball Software's example files. FIGURE...

## Installing Crystal Ball Monte Carlo Simulation Software

To get started with the business cases, you first have to install the Crystal Ball Monte Carlo simulation software. The Crystal Ball software needs to be installed prior to installing the Real Options Analysis Toolkit software covered in the next section. You do not have to install Crystal Ball if you have a previous version already installed. The version of Crystal Ball on the accompanying CD-ROM requires a minimum of Microsoft Windows 2000 or later, Microsoft Excel 97 or later, 10 MB hard...