Essay About Bp Amoco View Project Finance And Project Finance

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Why would BP Amoco view project finance as holding a “walkaway” put option?A put option is an option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security or commodity at a specified price within a specified time. The project finance to BP Amoco is fit to that definition. BP Amoco would have the right to “sell”-walk away from-the project finance if BP can get more benefit from doing so. In the case, the required rate of return of internal funding is lower than the cost of project finance and BP has the right to walk away which make the BP Amoco could view the project finance as holding a put option.When is the put option valuable?According to the definition of put option. The put option is valuable only when it is in the money which means the strike price of a put option is above the market price of the underlying asset. In this case, the put option is valuable only when the cost of refinancing by using internal funding is lower that the cost of current used project finance. Why may they not excise the option even if it was “ in the money” or financially attractive?Other attractive opportunities: maybe there are one or many more attractive projects to BP which could not get the project finance. Then BP could use the resource of internal funding to finance those projects. The influence of the relationship between AIOC and IFC & EBRD: If BP Amoco choose to exercise the option, that would entail the bad influence to that relationship and may cost BP Amoco a lot if it need project finance for other projects in the future.Should BP Amoco use project finance, corporate finance, or a combination of the two to fund its share of the Full Field Development Project?Project FinancePros: Firstly, usually the money from project finance has to be managed and recorded separately which make the management of cash become easier under this method than the others. Secondly, project finance enables the company have access to long-term funds that banks were often unwilling to lend. Cons: it need more time to the procedure done which lead to more time cost and the cost of debt for project finance is also higher that corporate finance. Corporate Finance Pros: First, the cost of corporate finance is lower that the project finance because the lender would evaluate the risk the lending based on the whole company instead of one single project. Second, the process of the corporate finance is shorter than project finance. If the BP Amoco need the finance urgently, then it should choose corporate finance.