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Risk-Based Characterization for Vapour Intrusion at a Conceptual Brownfields Site: Part 2. Pricing the Risk Capital
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The focus of this paper is to price the guarantee period of a brownfields redevelopment project, which is the present value of the sum of the cost of failure plus the cost of data collection. The cost of failure is essentially a contingency fee that the developers must reserve from the sale of each residential house to cover the risk of repurchasing it and maintaining the development at a future date. Its price is largely dependent on prediction uncertainty associated with three metrics evaluated in a companion paper. Two methods were adapted from Yu et al. (2012) to estimate the risk capital portion of the contingency fee to cover the developers’ preference for risk aversion. These methods were modified to accommodate the worth of hydrogeological data in reducing prediction uncertainty. The first method is denoted as the “actuarial” premium calculation principle because it follows classical P&C insurance policies. This method uses the standard deviation of the cost of failure as a safety loading factor. The second method is denoted as the “financial” premium calculation principle, which expresses the safety loading term as an interest rate surcharge in excess of the risk free (nominal) interest rate. The advantage of this approach is that it provides an unambiguous link between market information and the worth of hydrogeological data in reducing prediction uncertainty.
Keywords:Risk-Cost-Benefit Analysis; Optimization; Probability of Failure; Risk Capital; Real Option
Author: Xiaomin Wang1, Andre J.A. Unger1, Beth L. Parker2
1.Department of Earth and Environmental Sciences, University of Waterloo, 200 University Avenue West, Waterloo, Ontario, Canada
2.School of Engineering, University of Guelph, 50 Stone Road East Guelph, Ontario, Canada
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