Market risk in Project Finance: Importance for Investors and Reliability of Forecasts

Abstract

Relevance. Any ongoing business as well as new investment projects under development are associated with many risks. One of the most obvious and significant risks is the market risk i.e., in the context of the article, the risk of failure to achieve prices, volumes and, in general, the proceeds from sales, compared to those planned in the business plan and financial model of the project. In modern academic and business literature, approaches to the analysis of the market as a whole and marketing issues are discussed in sufficient level of details, however, the problems of examining these aspects in project finance and while investing in new projects in general are not considered.The purpose is Consider approaches to understanding significance of the market risk and measures to deal with the risk in the process of review of an investment project.Objectives. To discuss the possible components of the risk, provide an example of assessing its materiality for the project investment attractiveness ratios, approaches to analysis of the projections.Methodology. Methods of modelling, analysis and synthesis, induction and deduction, critical analysis and comparison of sources as well as analysis of publicly available information are used.Results. The article discusses approaches to the analysis of market risk in the implementation of an investment project, presents a simplified example of its importance based on a brief model of discounted cash flows, and identifies key assumptions and limitations. The consideration of possible mistakes in consensus forecast provides the greatest practical importance.Conclusions. The market risk is one of the key risks in the development of an investment project and project review in project finance. A set of measures is needed to account for and reduce of the risk. One of the most important issues is the critical analysis of available forecasts. In the next article, other issues will be considered in details i.e. approaches to working with an independent consultant, a number of specific requirements in the marketing consultant scope of work. Technical measures to minimise market risk in the financial model of the project will also be considered.