Abstract
Working interest, W, and risk adjusted value, RA V, are evaluated using both Cozzolino's formula for exponential dependence of risk aversion and also for a hyperbolic tangent dependence. In addition, the general method is given of constructing an RA V formula for any functional choice of risk aversion dependence. Two examples are given to illustrate how the model dependencies influence choices of working interest and risk adjusted value depending on whether the expected value of the project is positive or negative.
In general the Cozzolino formula provides a more conservative position for risk than does the hyperbolic tangent formula, reflecting the difference in corporate attitudes to risk aversion.
The commonly used Cozzolino formula is shown to have simple exact arithmetic expressions for maximum working interest and maximum RAV; the hyperbolic tangent formula has approximate analytic expressions. Both formulae also yield approximate analytical expressions for the working interest yielding a risk neutral RAV of zero. These arithmetic results are useful for making quick estimates of working interest ranges and risk adjusted values.
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