Final answer:
A fixed price building contract reduces financial risk for lenders by ensuring cost predictability, shielding them from inflation and interest rate fluctuations.
Step-by-step explanation:
From a lender's perspective, a fixed price building contract would help reduce financial risk associated with cost overruns. By fixing the price for the construction project, the risk of increases in material or labor costs is transferred from the lender to the contractor. In the context of loans and mortgages, contracts with fixed rates offer predictability, which is beneficial during periods of economic volatility.
For instance, in a fixed-rate mortgage scenario, if inflation falls unexpectedly, the homeowner benefits as the payments remain constant, while the real interest rate effectively decreases. Conversely, with an adjustable-rate mortgage, the homeowner's payments can fluctuate with market interest rates, potentially increasing if inflation rises. Thus, a fixed price contract is an instrument that helps manage and mitigate inflation risk and interest rate risk.