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    Applicability of Financial Derivatives for Hedging Material Price Risk in Highway Construction

    Source: Journal of Construction Engineering and Management:;2019:;Volume ( 145 ):;issue: 005
    Author:
    Afshin Firouzi; Mohammad Vahdatmanesh
    DOI: 10.1061/(ASCE)CO.1943-7862.0001639
    Publisher: American Society of Civil Engineers
    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.
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      Applicability of Financial Derivatives for Hedging Material Price Risk in Highway Construction

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    http://yetl.yabesh.ir/yetl1/handle/yetl/4254704
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    contributor authorAfshin Firouzi; Mohammad Vahdatmanesh
    date accessioned2019-03-10T12:02:05Z
    date available2019-03-10T12:02:05Z
    date issued2019
    identifier other%28ASCE%29CO.1943-7862.0001639.pdf
    identifier urihttp://yetl.yabesh.ir/yetl1/handle/yetl/4254704
    description abstractHighway 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.
    publisherAmerican Society of Civil Engineers
    titleApplicability of Financial Derivatives for Hedging Material Price Risk in Highway Construction
    typeJournal Paper
    journal volume145
    journal issue5
    journal titleJournal of Construction Engineering and Management
    identifier doi10.1061/(ASCE)CO.1943-7862.0001639
    page04019023
    treeJournal of Construction Engineering and Management:;2019:;Volume ( 145 ):;issue: 005
    contenttypeFulltext
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