On project financing risk management

The economic rationale for Project Financing claims two main aspects, the dimension of leverage and the high level of risk. Indeed, the aim of Project Financing is not only descriptive in order to characterize the several causes of risk, but rather normative and it refers both to financial innovation-insurance instruments and to typical management strategies represented by a variety of ratios. All the projects are affected by risks at some level and in order to justify the activation of such a complex structure such as Project Financing it is worth characterizing the role of information transfer between banks and firms and giving suitable criteria to obtain an optimal capital structure with respect to leverage and the influence of the new project on the firms. The recent development of studies on risk aggravation takes advantage of the utility theory and characterizes the behaviour of Project Managers, when facing a non correct forecast of costs and returns. The traditional approach to the amortization strategies is an equilibrium one. But the increasing dimension of risks and their time distribution require the introduction of dynamic optimization problems to control the project's management. The quantitative tools to control the variety of risks and the dynamic optimization techniques allow us to state an ideal optimal level of risk for the project and to analyse the properties of an optimal reimbursement policy with respect to the market parameters. Therefore, a dynamic optimization model can be stated to control the capital accumulation and the debt reimbursement simultaneously.