Hedging as a tool to manage the financial risk of sri lankan construction contractors

Abstract

Financial risk management is an essential part of the construction industry. It is therefore incumbent upon construction contractors to adopt proper management techniques in order to safeguard against financial risk where such risks can often be serious enough to drive a construction company to distress or even bankruptcy. The aim of this study is to assist Sri Lankan construction contractors to manage financial risk through various hedging techniques. In order to achieve the above aim, the most critical financial risk factors of contractors and the most relevant hedging techniques which can be used to manage those financial risk factors were identified using the Analytical Hierarchical Process (AHP) through conducting a survey among leading practitioners with contracting experience. Four financial risk factors which were identified through the literature survey and preliminary interviews have been ranked according to their criticality. The six hedging techniques that were identified via the questionnaire were graded and measured according to their ability to manage the financial risks and in terms of the frequency of their usage in the Sri Lankan construction sector. The study was able by these means to identify the most appropriate hedging techniques, in terms of their usage, to manage the most critical financial risk factors in the Sri Lankan construction industry. The findings of the study suggest that hedging techniques appropriate for the purpose of managing financial risks among Sri Lankan construction contractors. Keywords: derivatives, hedging, financial risk management