Question

In: Finance

Assume that have recently been appointed as a member of the Financial Risk Management team of...

Assume that have recently been appointed as a member of the Financial Risk Management team of your organisation. For the purpose of this research paper, select a company of your choice, an international firm and evaluate how well the company manages its financial risk by addressing the following issues.

1. Identify and explain the main financial risks the company is exposed to and explain the methods you used to identify the financial risks.

2. In reference to the financial risks identified part (1) above, make recommendations to the company whether it should hedge 100% of the risks, or part of the risk or none at all.

3. Give justification for each of your recommendations. Assume you recommend some hedging in part (2) explain the specific hedging strategies (internal or external) the company will apply to mitigate the specific financial risks.

Solutions

Expert Solution

The company is Apache Corporation listed on NYSE and offices in multiple geographies

Part 1 - Key financial risk:

1. Commodity price risk: Apache involved in production of oil and gas. Prices are decided by the demand and supply of the commodity. Fluctuation in prices can effect the financials of the company

2.Operational risk: company operations are subject to hazards and risks inherent in the drilling, production, and transportation of oil and gas. Failure or loss of equipment, as the result of equipment malfunctions, cyberattacks, or natural disasters could result in property damages, personal injury, environmental pollution, and other damages which can effect the financials or credit position of the company

3. Credit risk: Company has exposure to different counterparties which expose the company to credit risk in the event of default of counterparty. It can impare the financial position of the company

Part 2 -

1. Company should partially hedge the commodity price risk to avoid the risk of low oil and gas prices in the market

2. Company should fully hedge the credit risk

3. Company should fully hedge the operational risk

Part 3 -

1. Company should partially hedge the commodity price risk to avoid the risk of downward prices. Company should not go for 100% hedge as company will not be able to get benefited from price upside.

2. Credit risk should be fully hedged to avoid the ability to fulfill the existing obligations towards the company and their willingness to enter into future transactions with the company

3. Operational risk should be fully hedged to avoid the any disturbances in the production or related activites which can put company into financial distress.

Strategies -

1. Oil and gas futures and forwards to hedge the commodity price risk

2. credit swaps or credit spread options to hedge the credit risk

3. Insurance of the key assets to hedge the operational risk


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