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identify some of the financial practices that a construction company can take to protect itself against interest rate ri...

identify some of the financial practices that a construction company can take to protect itself against interest rate risk, in particular. What are examples of recommended practices that construction firms can use to manage the risks associated with interest rate-related risks, and which strategies do you recommend?

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Answer #1

Interest rate risk means volatility/fluctuation of the interest rates.

The construction company can manage its interest rate risk by the following products:
1. Entered into a forward contract to fix its interest rate on a customised basis.
2. Enter into futures contracts to hedge its interest rate as per available contracts in the market.
3. Enter into the option contract. Option contracts ensure less risk but more premium. Ex: Buy call option of cement in the commodities market, if the cement rates are expected to rise.
4. Enter into a financial swap for converting fixed rate into a floating rate or vice versa.
5. Refinancing the loans when the interest rate falls.

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