The Immunization of Capital Projects and Other Cash Flow Streams

Firms are continually investing resources in projects that are risky in the sense of uncertain outcomes. The need for firms to protect the net asset backing of their project portfolios and to immunise against unacceptable cash flow streams is evident in a number of contemporary practices such as factoring, sub-leasing and joint ventures. But the ad hoc farming out of projects does not provide a means of systemically deriving strategies that are optimal in terms of providing adequate protection at minimum cost. The model presented in this paper does provide such a framework. It illustrates why firms use joint-ventures and similar strategies as a form of risk sharing and shows how it is implemented in an optimal manner.