Using analysis to influence strategic-decision making: option valuation at ECGD (Export Credits Guarantee Department of UK government)

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.