Management of Project Risk

This chapter provides an overview of the risk mitigation and management measures available to project developers. Complex derivative products are fashioned using the basic building blocks: options, swaps, forwards and futures. With increasing sophistication, swaps are generally packaged with other products and managed by large banks and financial institutions. The put option agreement provides for the acquisition of the outgoing investors&s; shares in accordance with a pre-agreed formula, within a prescribed time window. Under such circumstances, the external investors should look at other liquidity options. Hedging project risks with the help of options, futures, forwards or swaps reduces the down-side risks to a project and cuts out the volatility in projected cash-flows. Project sponsors prefer to mitigate uncertainty, even it if is associated with an upfront cost, compared to suffering the consequences of unforeseen adverse outcomes. Redemption of preference shares and repayment of project debt is relatively straightforward.