The Potential For Corporate Immunisation Of Commercial Projects

Firms are continually investing resources in risky projects which involve 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 optimal strategies which provide adequate protection at minimum cost. The options based hedging model used here illustrates why firms use factoring, joint-ventures and similar strategies as a form of risk sharing and shows how optimal risk sharing strategies can be derived and manipulated over a project's life in response changes in key parameter values to maintain adequate protection.