An Exotic Options-Based Approach for Revenue Risk Sharing of PPP Highway Projects

Articles in Press

Document Type : Original Article

Authors

1 Department of Project and Construction Management, School of Architecture, University of Tehran, Iran

2 Department of Project and Construction Management, School of Architecture , University of Tehran

Abstract

Revenue risk sharing is a challenging issue in PPP highway projects that can be addressed by the options theory. The objective of this study is going beyond the common standard options by suggesting a set of exotic options suitable in modeling the revenue risk sharing mechanisms of PPP highway projects, and proposing evaluation and comparison techniques of these mechanisms. First, a series of semi-structured interviews are conducted to collect the experts’ judgments on the implication of each exotic option for the revenue risk sharing mechanisms of PPP highway projects. Then, through a content analysis of the interviews, the applications of these exotic options in the context of highway projects are identified and their risk sharing mechanisms are designed. The Geometric Brownian Motion and the Monte Carlo simulation are employed for forecasting the revenues and payment valuation of the options during the operation of highway projects. The application of the proposed mechanisms is tested in a real BOT highway project. The developed mechanisms and their quantitative evaluation techniques demonstrate their efficacy in supporting both public and private stakeholders of PPP highway projects in revenue risk sharing by (a) designing revenue risk sharing mechanisms, (b) simulating future revenues, (c) calculating the ultimate payment of options-based revenue risk sharing mechanisms, and (d) evaluating the risk spectrums of stakeholders with diverse risk appetite tendencies. Lastly, this study represents how exotic options can enhance the capability, flexibility, and precision, of revenue risk sharing mechanisms of PPP highway projects which can guide both parties to a win-win situation through a revenue risk sharing structure that considers their requirements and strategies.

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Journal of Transportation Research

Articles in Press, Accepted Manuscript
Available Online from 16 June 2020

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