Many would argue that risk management is the single most important element of a construction
contractor's business enterprise. A significant risk to a contractor’s profitability is increased costs of
construction materials. In many cases construction materials are the largest single component of a
construction project budget. Contractors generally utilize contingency funds or contractual price
adjustments clauses to address the risk associated with changes in construction material pricing. However,
the use of contingency and contractual mechanisms comes at a cost. The additional costs are especially
detrimental in construction markets that are competitively bid, because higher bid prices result in winning
fewer jobs. An alternative risk mitigation is the use of commodity futures to hedge the risk of increasing
construction material prices. A hedge is strategy for limiting losses by holding a portfolio of noncorrelated
assets. The research of this study evaluates the application of commodity futures for hedging
material pricing risk in the construction industry. Through statistical analysis and simulation studies this
research concludes that utilizing commodity futures as a hedging strategy is effective risk mitigation
against increased construction material costs. In addition, through a literature review this study explains
the fundamentals of the commodity future market, and presents the mechanics of trading commodity
futures. A guideline for using commodity futures as a hedging tool is included in this study.Title Page / Table of Contents / List of Exhibits / List of Appendices / Abstract / Introduction / Literature Review / Research Methodology / Analysis / Results / Hedging Guidelines & Considerations / Conclusions / Recommendations for Further Research / Acknowledgements / Appendice
