Question

The company’s profit and loss is subject to many risk factors, such as the price change of oil and foreign exchange rate fluctuations. The company will benefit US$900 for each 1 cent increase in the price per bbl of oil. As the market price of oil is quite volatile, the company is considering using some strategies to manage its risk exposure. One way to hedge these exposures is to use futures contracts. There are futures contracts traded in the COMEX division of the Chicago Mercantile Exchange (CME) Group. In your consulting report, please address the following questions: 1) Outline the potential financial risks and operational risks faced by Gemoil and explain these risks in details.

Answer 1

potential financial risk:- financial risk may be defined as the risk that is associated with change in capital structure of the company, change in the interests of the country, change in exchange rates etc. here in the Gemoil the financial risk is associated with fluctuating in the rates of foreign exchange.

operation risk:- operation risk may be defined as the risk associated with operation of company like change in the value of equipment, change in the price of raw materials etc. here in the Geomoil the operation is due to change in price of oil.

risk may be defined as the difference between the expected and actual outcome.

financial risk explanation:- financial risk is one of the major problem faced by companies all most all over the world. it may be defined as the risk that leads to financial loss to company. it generally caused due to change in interest rates of the company, change in foreign exchange rates, change in stock prices etc.

The following are the types of finance risk:

Market risk

Credit Risk

liquidity risk

Market risk:- market risk may be defined as the risk that arises due to fluctuations in the prices of financial instruments like equity, debentures etc.

credit risk:- credit risk may be defined as the risk associated with credit which means if a person fails to pay the funds that have taken on credit.

liquidity risk:- liquidity risk may be defined as the risk where the company is not in a position to meet its short term liabilities.

operational risk:- operational risk may be defined as the risk associated due to technical errors in the machinery, change in the prices of raw materials, loss made by employees like theft, fraud, any activity that disturbs the business process etc. operational risk is quite common in companies and can be controlled by following strategies.