Firouzi, A and Vahdatmanesh, M (2019) Applicability of financial derivatives for hedging material price risk in highway construction. Journal of Construction Engineering and Management, 145(5): 04019023, ISSN 0733-9364
Abstract
Highway infrastructure is critical to the sustainable development of a country. Nonetheless, these capital-intensive projects, especially in build-operate-transfer (BOT) contracts, are prone to the risk of material price fluctuations during the construction phase, which may lead to project cost overruns. To surmount the effects of downside exposures, construction companies seek innovative risk management tools. The main intention of the present study is to show how the construction industry can take advantage of well-developed financial derivatives. In particular, a new methodology is presented for hedging the material price risk using the Bermudan collar option, the applicability of which is shown via a worked example. It was found that these over-the-counter (OTc) options are appropriate risk management instruments, which conforms to the characteristics of highway construction. It is also concluded that in choosing their hedging strategy, companies should have due regard to the specific size, time frame, and counterparty credit risk.
| Item Type: | Article |
|---|---|
| Uncontrolled Keywords: | bermudan option; binomial tree; highway construction; price risk; proxy hedging |
| Index terms: | highway construction, build-operate-transfer, risk management, construction industry, risk management tool, highway infrastructure, construction phase, option, sustainable development, strategy, project cost, overrun, construction company, methodology, exposure |
| Subjects: | project controls, decision analysis, industry analysis, management, civil engineering, economics, public and environmental health, research methods, health safety and environment, financial risk, contractual arrangements, project delivery, risk assessment, organization |
| Topics: | Procurement, Risk Management, Engineering Principles, Project Management, Research Practice, Health and Safety, Business Strategy, Cost Management, Time Control |
| Descriptive scope: | 3 PCT |
N.B. Descriptive scope is a count of how many of the five facets of empirical research are indicated by the words used in title, abstract and keywords. It is not intended as a judgement on the research; merely a count of the kind of word we would expect to indicate Phenomenon, Concepts, Theoretical framing, Empirical techniques, Analytical techniques. If all five are present, then a code of “5 PCTEA” will indicate this. If you feel the coding for this record is questionable, we welcome discussion around the terms we matched or the way we categorized them. The facet you would expect may not be coded, or a facet may be coded inappropriately. This can also bear on a larger question, of which facets should be treated as defining in construction management research. Please get in touch, and we will look at it. More details here