Abstract
This case-oriented paper shows how an in-house OR group in a small Government Department (ECGD) influences decision-making by feeding technical analysis directly into strategic decision-making. It covers both the technical detail of the analysis and the OR process which led to implementation. The technical part of the paper describes how the forecast expected cost of giving a fixed interest rate hold to a borrower was estimated using an option valuation. The cost estimation is complicated by the context: ECGD is also providing a guarantee of loan repayment by the overseas borrower to a bank, and ECGD costs include a binary bank margin cost which depends on whether the fixed interest rate hold is taken up by the borrower. The remainder of the paper describes the way OR analysts worked with decision-makers and considers the implications for effective practice.
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References
Hull JC (2005). Options, Futures and Other Derivatives, 6th edn.. Pearson Prentice-Hall: New Jersey.
Pidd M (2004). Contemporary OR/MS in strategy development and policy-making: some reflections. J Opl Res Soc 55: 791–800.
Acknowledgements
The work described here and associated 2005 FREF operational systems are the product of work by a number of OR analysts, notably Ian Vincent, Philipp Reinfeld, Emily Cosser, other ECGD staff and external advisers over the last 4 years. Thanks to John Waterman, John Cross, Vasso Agapitou and Ali Sherwani for comments on earlier drafts of this paper.
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Calvert, D., Kaufman, R. Using analysis to influence strategic-decision making: option valuation at ECGD. J Oper Res Soc 59, 198–202 (2008). https://doi.org/10.1057/palgrave.jors.2602545
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DOI: https://doi.org/10.1057/palgrave.jors.2602545