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Decision-Making and Quantitative Risk Analysis
Project Risk Assessment
Decision-Making and Quantitative Risk Analysis
Scottsdale Insurance Company Utilizes @RISK
For this analysis, Scottsdale Insurance Company used @RISK to determine Risk Adjusted Returns on Capital (RAROC), a framework for analyzing risk-adjusted financial performance. Accurate assessment of RAROC enables organizations to get a consistent view of profitability across businesses. RAROC also provides a clear assessment of the return on investment forecast, after accounting for expenditures required to cover potential risk.
Palisade Europe is Expanding –
Seeking to Fill Two New Positions
Join us again this year in Las Vegas for the most important event of the year for quantitative risk and decision analysis! In its seventh year and attracting more people every time, the Palisade Risk Conference has become the “must attend” event for professionals dealing with risk in any industry. Over the course of two days, industry experts and Palisade consultants will present a selection of over 40 real-world case studies, software workshops, and training classes. Learn about innovative and interesting approaches to managing risk and uncertainty in a wide range of business applications. You can also get personalized one-on-one consulting on your risk models included with your conference registration. And of course networking events and lunches are always included.
New this year, we are moving to the exciting Mandalay Bay Resort and Casino. Book your room now at this 5-star resort for only $149.
Attracting over 100 delegates, Palisade’s 2012 Risk Conference in Sydney, Australia offered something for everyone, regardless of industry sector. The event was held at the Hilton Sydney on 29-30 May. Professionals attended from industries such as mining, engineering and construction, oil and gas, finance and insurance, and more. There were dozens of presentations and training sessions divided into three tracks.
Over the course of the two days this was followed by sessions on managing risk in large project schedules, more effectively estimating costs, planning for insurance, ensuring environmental safety, financial valuation, and more. There were also a number of sessions on how to better think about risk in terms of organizational culture. Furthermore, Palisade staff delivered numerous software training sessions using the latest software techniques.
New this year, delegates took advantage of one-on-one Expert Sessions. Offered by Palisade consultants and technical experts, these hands-on, individualized consulting sessions helped many attendees improve their risk models.
The conference also featured a plenary address by Andrew Kight of Aon Global Risk Consulting on the topic of considering an organisation’s risk appetite in a quantitative way when planning insurance strategies.
"The Palisade conference was hugely enjoyable as well as educational, and well pitched - I like the mix between case studies and software demos such that both beginners and experts can learn something new. I will definitely be at the next one as well as recommend it to others."
There is a large amount of theory and practice in the project industry associated with the management of risk and contingency. Organizations such as the Association for the Advancement of Cost Engineering International (AACEi), the Project Management Institute (PMI) and countless other books, presentations and research papers have produced a seemingly endless stream of literature on this topic.
Much of the evolution of project processes has focused on using risk-based methods to calculate the amount of contingency required prior to commencing a project. Prior to project approval, stakeholders will often require sophisticated analysis of project costs using stochastical / Monte Carlo techniques. However once a project is approved, contingency is managed using empirical, or “rule of thumb” methods, and the focus moves to a single Forecast Final Cost and Completion Date.
This paper discusses some of the issues associated with this approach, and proposes a manageable method whereby the contingency model can be maintained and updated in line with changes to the risk profile throughout the Implementation Stage of a Project.
Many investment opportunities involve decisions that are made at different points in time. If the value of the investment opportunities depend on the price of a commodity (such as gold price) then the risk neutral approach we used to value stock options can be used to value real investment opportunities. This approach to valuing investment opportunities is known as the real option approach.
GoldCo is trying to value a 10‐year lease on a gold mine. Each year up to 10,000 ounces of gold can be extracted at a cost of $200 per ounce. The risk free rate is assumed to remain constant at 10%. The price received for all gold extracted during a year is assumed to equal the price of gold at the beginning of the year, but the all cash flows occur at the end of the year. The current price of gold is $400 and the future price of gold is uncertain. We model the future price of gold with a binomial tree. Each year we assume that gold will (with probability .75) increase by 20% and (with probability .25) decrease by 10%. The annual interest rate is 10%. What is the value of the lease?
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