Monte Carlo simulation and a value‐at‐risk of concessionary project

Abstract

Purpose – The purpose of this paper is to propose a comprehensive approach to the valuation of an infrastructure concession right and quantitative risk management projects in the People's Republic of China.Design/methodology/approach – The paper outlines a methodology, incorporating an economic model to appraise the dynamic value and risk of concession investment in the context of the design of concession contracts.Findings – The framework of the study simulates the present value of net cash flow and identifies probability with different parameters in concession contracts as a way to establish a correlation between parameters and net present value distribution. Moreover, the paper uses the technique of value‐at‐risk to set up an economic model to appraise the dynamic value and risk of a concession investment and analyse the key issues in the concession contracts design phase.Research limitations/implications – It is difficult to estimate precisely the distribution of parameters in the model. In particular...