TITLE:
A Proposal for an African Investment Guarantee Agency (AIGA) and the Valuation of Associated Instruments
AUTHORS:
Joseph Atta-Mensah
KEYWORDS:
Indexed-Linked Bonds, Investment Guarantee and Risk Premium
JOURNAL NAME:
Theoretical Economics Letters,
Vol.9 No.7,
September
30,
2019
ABSTRACT: The paper calls for the creation of an African
Investment Guarantee Agency (AIGA) to support and strengthen the financing of
development projects, including infrastructure projects. The main objective of
AIGA would be to provide noncommercial investment guarantees to African and
non-African investors, private or public who are desirous of investing in
Africa but do not have the appetite for the above non-commercial risks. Using
option-pricing techniques, the paper derives the cost of AIGA’s guarantees and
the associated implied risk premium. Using infrastructure-linked bonds as an
example, the paper indicates that the risk premium embedded in an
infrastructure-indexed bond contract is seen as a function of the ratio of the
cost of the infrastructure-indexed bond guarantee and the present value of the
promised payment.