Financial hedging in the construction industry
Contents |
[edit] Introduction
In common parlance, ‘hedging one's bets’ usually involves putting something in place to protect the individual from a possible loss or negative future event. It is taking a parallel action to offset something that might happen which is thought might result in a loss or unfortunate state of affairs. Buying home insurance is a hedge against burglary, fire and other calamities.
[edit] Financial hedging
Similarly, in the finance sector, a hedge is a risk management strategy used to protect against a possible financial loss. It is a counterbalancing tool that protects individuals or companies from a loss that may be incurred in some parallel financial investment. It is important to remember that hedging does not usually make investors money, but protects them from financial loss.
A hedge may comprise one or many different types of financial investments such as stocks, insurance, forward contracts, exchange-traded funds and options. In creating this hedge, an individual or company may take an opposing position in one investment or market to balance a risk that may be incurred in a contrary investment or market. The risk, should it occur, will usually be to do with adverse price movements
[edit] Long and short hedges.
Long and short hedges are both classed as ‘futures’ and can be favourable as they iron-out price volatility in a market.
A long hedge contract allows a company (Company A) to buy - say copper - at a specific price at a set date in the future. If the price of copper rises before the contract expires, company A has saved money by paying a lower price (otherwise it would have bought copper at a higher price); however, if the price of copper falls, company A loses out as it must still pay the higher price agreed to in the contract. In that case, the hedge has been costly and it would have been better not to have hedged at all.
A short hedge protects against the price of an asset falling at some point in the future. For example, an aluminium producer (company B) might enter into a contract (short hedge) to lock into a preferred sale price allowing it to sell aluminium at a specified future price. Should the price of aluminium fall below that price during the contract period, company B can sell at the (higher) price it agreed to in the contract and will have reduced its losses and earned a profit.
[edit] Reasons to hedge
- Can minimise exposure to risk.
- Determines the sale or purchase price of a commodity or security.
- Produces consistent and stable cash-flows.
- Minimises transaction costs.
[edit] Related articles on Designing Buildings Wiki
- Budget
- Business case.
- Business plan
- Cashflow.
- Cash flow forecast.
- Construction loan.
- Construction Supply Chain Payment Charter.
- Fair payment practices for construction.
- Housing Grants, Construction and Regeneration Act.
- Remedies for late payment.
- Scheme for Construction Contracts.
- The Late Payment of Commercial Debts Regulations 2013.
.
Featured articles and news
The 5 elements of seiri, seiton, seiso, seiketsu and shitsuke.
Shading for housing, a design guide
A look back at embedding a new culture of shading.
The Architectural Technology Awards
The AT Awards 2025 are open for entries!
ECA Blueprint for Electrification
The 'mosaic of interconnected challenges' and how to deliver the UK’s Transition to Clean Power.
Grenfell Tower Principal Contractor Award notice
Tower repair and maintenance contractor announced as demolition contractor.
Passivhaus social homes benefit from heat pump service
Sixteen new homes designed and built to achieve Passivhaus constructed in Dumfries & Galloway.
CABE Publishes Results of 2025 Building Control Survey
Concern over lack of understanding of how roles have changed since the introduction of the BSA 2022.
British Architectural Sculpture 1851-1951
A rich heritage of decorative and figurative sculpture. Book review.
A programme to tackle the lack of diversity.
Independent Building Control review panel
Five members of the newly established, Grenfell Tower Inquiry recommended, panel appointed.
Welsh Recharging Electrical Skills Charter progresses
ECA progressing on the ‘asks’ of the Recharging Electrical Skills Charter at the Senedd in Wales.
A brief history from 1890s to 2020s.
CIOB and CORBON combine forces
To elevate professional standards in Nigeria’s construction industry.
Amendment to the GB Energy Bill welcomed by ECA
Move prevents nationally-owned energy company from investing in solar panels produced by modern slavery.
Gregor Harvie argues that AI is state-sanctioned theft of IP.
Experimental AI housing target help for councils
Experimental AI could help councils meet housing targets by digitising records.
BSRIA Occupant Wellbeing survey BOW
Occupant satisfaction and wellbeing tool inc. physical environment, indoor facilities, functionality and accessibility.