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While the efficiency of financial systems rests primarily on proper risk assessment and management, real option valuation (ROV) grounds strategic thinking and decision making analysis. Starting with the adoption of ROV in capital budgeting process, risk is assessed in a way so that it can be prevented or exploited or both, creating future options t...
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... Penelitian-penelitian yang telah dilakukan untuk menguji pengaruh perumusan strategi terhadap kinerja organisasi sektor publik menunjukkan hasil yang beragam. Andrews (Muharam, 2011). ...
This study aims to analyze the effect of strategy formulation consisting of three variables, namely: strategic planning, logical incrementalism and blending approach to organizational performance with risk management effectiveness as a moderating variable at 71 Vertical Units of the Directorate General of Taxes (DGT) in Jakarta. This study uses primary data and secondary data. Primary data were obtained from distributing questionnaires to measure variables related to strategy formulation, while secondary data were used to measure the variables of risk management effectiveness and organizational performance. The data obtained were analyzed with the help of SPSS 22 and WarpPLS 5.0 applications. Based on the results of the analysis, it was concluded that two variables related to strategy formulation, namely strategic planning and blending approach, had a significant positive effect on organizational performance, while the other variable, that is logical incrementalism, had a significant negative effect on organizational performance. In addition, the effectiveness of risk management does not significantly affect the relationship between strategic planning, logical incrementalism and blending approach to organizational performance.
... Risk management should follow risk management cycle, in risk management procedure, one must master the strategic objectives then keep up with the present situation of the organization, this will help in identifying inherent risk of the organisation. Afterward, risk assessment which comprises of risk analysis and evaluation is carried out followed by risk reporting (threat and opportunity), decision, risk treatment, residual risk reporting and monitoring (Farrah, 2011) Organizations are to be proactive in managing risk, monitor continually and consciously in a way it relates with the firm strategic objectives. The management of risk is a requisite fragment of the business, it tends to boost the chances of accomplishment and likewise lessen losses possibility and chances of not attaining the overall organisation goal (Alarm, 2002). ...
... Antonio and Barbara (2013) defined risk management process as a concept of identifying, treating and then managing risk. This is an ongoing process and actions needed to be taken to reduce adverse effect of risk on an organization (Farrah, 2011). Van Staveren (2009) and Farrah (2011) listed five stages of managing risk: defining the objectives; recognizing the risks; appraising the risks; bearing in mind replacements and choosing means of treating the risk; executing and revising stage. ...
The current study investigated risk management and financial performance of manufacturing firms. Specifically, the study analyzed liquidity risk and market risk effect on after tax profit of manufacturing establishment in Nigeria. The study employed panel data over the period spanning from 2010-2019 across 10 firms. Secondary data were gathered through the annual reports of the selected firms. Correlation analysis and panel-based estimation techniques were used. The outcome showed that liquidity risk positively and significantly affect profit after tax while market risk (measured by interest rate risk) negatively and insignificantly affect profit after tax of sampled firms quoted in Nigeria. This study concluded that efficient and effective risk management will positively affect performance of quoted firms in Nigeria, most specially management of internal risk such as the liquidity risk. Hence, firms should build an internal control system flexible in nature to harness the benefit of internal risk management and also normalize the negative effect of external risk such as the interest rate on performance.
... (3) (Brosch, 2001;Muharam, 2011). ...
This paper presents a new method for selection of optimal options portfolios. The problem of defining optimal portfolios of real options is formulated as integer programming. The algorithm of generating an optimal portfolio of real options is also presented. The incremental benefit of portfolio of real options is valued using Monte Carlo simulation and modeling the prices and demand as Geometric Brownian Motion. The presented method allows to select optimal portfolios of real options with consideration of statistical and qualitative dependences of options. The results show that real options can generate a significant increase in the net present value (NPV).
... This causes that distinct sectors of economy demand for different steel products; and therefore, variation of product prices, even though correlated, vary [12]. However, it is difficult to valuate the output product switching strategy by using traditional methodologies such as discounted cash flow [1,2,5,7,10,11,13]. Instead, it can be valuated as a real option. ...
... When estimating the product switch option value, a Monte Carlo simulation must be carried out under the assumption that the uncertain variables involved follow a risk-neutral GBM. In this case, formula (4) should be used instead of the formula (3) [1,10]. Risk-premium () estimation can be done as described in Hull [8]. ...
Steel industry is subject to significant volatility in its output prices and market demands for different ranges of products. Therefore, it is common practice to invest in various assets, which gives the opportunity to diversify production and generate valuable switch options. This article investigates the incremental benefit of product switch options in steel plant projects. The options are valued using Monte Carlo simulation and modeling the prices of and demand for steel products as Geometric Brownian Motion (GBM). Our results show that the product switch option can generate a significant increase in the net present value (NPV) of metallurgical projects.
... This aspect cannot be neglected, especially in the context of imposing the limited resources allocation for reaching the proposed objectives, a fact that can generate significant risks [7]. In addition, they must also relate to the production volume and cost, so as to assure the profitability of the activity [8]. ...
The durable development imposes the respect of economic, social and environment-protection requests. The objective of this paper is the emphasis of applying a rational management at the level of all the siderurgical operators in order for a healthy economic growth to be assured, correlated with the environment protection. In this sense, the study is based on the analysis of a data set which relates to the growth rhythm of the gross domestic product (GDP), raw steel production and the consume of finished steel products per capita for the significant countries from the perspective of these indicators. Also, there are emphasized the objectives of sustainable development and the requests of the systematic management imposed by them at the level of the operators from the siderurgical industry.
... The project will provide the firm with a mini-mill plant capable of producing 182,000 tons of steel per year; however, the plant would be built in a country that is limited by the Kyoto Protocol such that the plant could not use more than 75% of its capacity without violating the emission and effluent limits. While the protocol cap may be lifted in year 4, the firm would be penalized if the emission and effluent levels exceeded the limits in the earlier years (Muharam, 2011). ...
Financial and real options values depend on several variables, including the volatility parameter. Real option volatility arises from the uncertainty of forecasts, and thus, is more subjective than financial option volatility. Difficulties in estimating the volatility parameter inhibit confidence in the resulting option value. This article reviews current estimation methods and proposes a reverse methodology. Real options analysis determines an option value which, combined with project NPV, creates an Expanded Net Present Value (ENPV) such that ENPV exceeding zero justifies a project. At breakeven (ENPV = 0), the minimum option value that justifies the project equals NPV. This breakeven option value determines an implied breakeven volatility.
... In practice, an approach to the risk often means avoiding it and therefore many companies do not have a crystallized approach to the risk. The relationship between the strategy, risk and time is essential from the viewpoint of the company's survival and development (Muharam 2011). Particularly important is the strategic risk that is associated with the implementation of strategic objectives, although a company cannot control all the factors and influence them. ...
Competition, innovation and globalization are buzzwords, which for a few decades have been present in almost every aspect of social or economic activity. In particular, the growing interest in issues associated with the competitiveness has contributed to the development of theories and studies in the scope of the competition analysis and the competition strategies. Publications related to the subject of strategic management put a considerable emphasis on the issues concerning the competitive advantage as a factor determining the success or failure of organizations or nations. An emphasis is put on the necessity to stand out against competitors or to build a long-term sustainable competitive advantage. The latest studies, in response to the increasing variability or even chaos in the environment, indicate the need to stray away from the term “sustainable”, and use the term “flexible” or “variable” in relation to the competitive advantage. The combination of sustainability, temporariness and otherness as the features characterizing an ideal competitive advantage seems to be one of the major challenges to be faced both by organizations implementing the strategic management process and theoreticians studying this area.
... There are several real option valuation methods used to assess real investments, some of which are often used in project valuation. These include the Geske compound, Carlsson-Fullér, Datar-Mathews, and fuzzy payment methods [64]. ...
Today, portfolio management is an important task for all companies. The aim of portfolio selection is to choose a set of projects from a pool of possible projects such that the value of financial actions is maximized conditional on resource availability and technical limitations. However, existing portfolio selection methods and models do not significantly consider the dimension of time. Nevertheless, the best portfolio selection decisions depend on investor characteristics and expectations as well as the coordination of portfolio cash flows with financial plans. In this paper, we provide a goal programming model based on the current perception of the future prices of existing portfolio projects and present a plan for the selection of the optimal project portfolio by taking into account the flows desired by investors. Goal Programming (GP) is a very useful approach in the area of multiple criteria decision making that allows the decision maker to include multiple deviations of restrictions and goals, especially in the area of portfolio selection. This paper gives an application of GP to portfolio selection and analysis problems. To incorporate uncertainty into the model, portfolio prices and multiple criteria are considered in fuzzy conditions. In addition, we consider real option valuation in project portfolio management (PPM). We also present a method of fuzzifying PPM parameters using expert opinions. In applying the model, we consider a 6-project portfolio over five investment periods and compare the use of the model in fuzzy and non-fuzzy situations.
... Few studies were found relating steel sector and real options analysis and none valuing this managerial flexibility in the steel industry. Muharam (2011) values investment deferral, expansion and abandonment real options in the steel industry but does not consider product switch options in this sector. ...
Steel is an alloy composed of iron and carbon for which there are two main large-scale production processes: using iron ore and coal as raw materials through a method known as integrated plants with blast furnaces and using iron scrap melted in electrical furnaces, also known as mini-mills or semi-integrated plants. The production in integrated plants typically implies greater investment, but is more cost-competitive as it provides greater economies of scale. The disadvantage of this method is that the furnaces basically need to work almost continuously through their life span, thus reducing the flexibility of production adjustment to market demands. To attenuate this problem, huge investments in lamination assets are commonly made, generating the possibility of production diversification and valuable switch options. This work values an output switch option in a hypothetical integrated steel plant composed of a blast furnace and a hot laminator. Results show that this option can generate a significant increase in the NPV of blast furnace plants. Results also emphasize the importance of correctly choosing the stochastic process for the underlying uncertainty and the effect it may have on the switch option value.
... SMEs in steel industry usually confront with problems like risk assessment, lack of resource and so on. But in a research that is done by Muharam, a useful analysis, ROV (real option valuation), can help strategic planning process and pick up guidelines to overcome the risks (Muharam, 2011). ...
Generally the behaviors of organizations in business turbulent environment during the specific time horizon distinguish global concept of Strategy which like any other subject of organizations, obligate top level directors to plan, organize, control and finally manage it depend on dominant atmosphere of society or industry. Strategic Planning in both profit and non-profit organizations is based on fast changes in internal and external environment and active corporations in this area. Some changes have existed all over the history, but, what differs this period with other ones is rapid change, complicated and developed environment of organizations. In this situation, organizations and firms tend to keep balance and step by step develop their competency. Now in this paper through a real case study, we design strategic plan in MAHAM engineering (MSI) Group, as one of the pioneer companies in welding inspection and NDT experiments in Iran, to support and cover its mission by using David framework. During the process, at first Statement of mission, internal factors matrix, external factors matrix, and internal external matrix are designed and prepared. By assessment of following matrixes, SWOT (Strength, Weakness, Opportunity, and Threat) matrix is gained. Finally the decision can be taken which strategies are more reliable and achievable by using QSPM (Quantitative Strategic Planning Matrix).
