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The Journal of Structured Finance

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Primary Article

Risk Measurement for Project Finance Guarantees

Chris Marrison
The Journal of Structured Finance Summer 2001, 7 (2) 43-53; DOI: https://doi.org/10.3905/jsf.2001.320251
Chris Marrison
A consultant with Risk Integrated. At the time of writing this study he was a Managing Principal with the Capital Markets Company in New York.
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Abstract

This article presents a methodology for quantifying the risk of financial guarantees to structured projects such as toll-roads. The results answer the following questions: how much should be charged for giving the guarantee, what is the effective subsidy, what reserve is required to protect against potential future losses, and what is the loss profile over the life of the project. Importantly, the analysis uses Monte Carlo evaluation to calculate the portfolio effects of diversification and correlation among projects. The article lays out the methodology, discusses the policy implications, and gives concrete illustrations of the approach by calculating examples of guarantees to a toll road and a bank. The discussion focuses on the management of a guarantee program by a government. The framework also can be used for other government contingent liabilities and can be used by banks and project finance companies to structure projects, price portfolios, and arbitrage.

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The Journal of Structured Finance
Vol. 7, Issue 2
Summer 2001
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Risk Measurement for Project Finance Guarantees
Chris Marrison
The Journal of Structured Finance Jul 2001, 7 (2) 43-53; DOI: 10.3905/jsf.2001.320251

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Risk Measurement for Project Finance Guarantees
Chris Marrison
The Journal of Structured Finance Jul 2001, 7 (2) 43-53; DOI: 10.3905/jsf.2001.320251
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