Graham Glenday

Special Issue

Risk-Sharing Contracts in Project Appraisal


This article discusses how to adapt Monte Carlo simulation techniques for the analysis of risk-sharing contracts. It outlines parallels with contingent claims analysis of risk-sharing contracts, and discusses the roles and effects of the different basic types of risk contracts in managing risk and improving the feasibility of projects, particularly large-scale resource and utility contracts. The author presents the simple analytics of how risksharing contracts affect the expected returns and variance in these returns of the various participants in a project, along with how to incorporate risk sharing in Monte Carlo simulation technique models of the appraisal of projects. These techniques make the analysis of different structures of often complicated contracts for large complex projects tractable.