- Project plans
- Project activities
- Legislation and standards
- Industry context
- Specialist wikis
Last edited 18 Feb 2021
Financial hedging in the construction industry
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.
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
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.
- 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.
 Related articles on Designing Buildings Wiki
- Business case.
- Business plan
- 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
From the basics to the future from our Cohesive BIM wiki.
As electrical sector feels skills shortage bite.
CIOB Academy’s course take-up inked to external factors.
Q and A with self-representing artist, Hannah Shergold.
And publishes three-year strategic plan.
Introducing changes to make it more effective from 2024.
Shortlist announced for 2023 public choice award vote.
The last of the Victorians. Book review.
An exotic name that is shrouded in mystery.
Fropm practice to research and the business of materials.
Terms, histories, theories and practices.
Alteration and everything else before demolition.
And CIOB's response.
Presidential update from CIAT's Eddie Weir PCIAT.