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FIN80018 Hedging Strategies - Assignment

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Financial Risk Management (FIN80018)

   

Added on  2020-05-11

FIN80018 Hedging Strategies - Assignment

   

Financial Risk Management (FIN80018)

   Added on 2020-05-11

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Exxon Mobil 1EXXON MOBILBy (Student’s Name)Professor’s Name College Course Date
FIN80018 Hedging Strategies - Assignment_1
Exxon Mobil 2PART D: SPECIFIC HEDGING STRATEGIES Derivative for Commodity Risk ExposureThe following particulars are demonstrative of the exposure that shall be hedged via theutilization of the recommended derivative, the CME Crude Oil call options contract. Exposures to be Hedged Cost of purchasing the crude oil USD 1.04BPercentage proportion to be hedgedFifty percent (50%)Derivative to be usedCME Crude Oil Options ContractNo. of derivative contract each hedged10400000000/27=385185185 contractsDelivery months for each derivativeDecember 2017Prices at the time of Recommendations27USDThe company’s engagement in the call option will allow Exxon Mobil to hedge the firm’sposition changes in the crude oil prices. Via the purchase of the call option, in case the strikeprice are beneath the market prices, Exxon Mobil will be able to exercise the option at the expirydate (December 2017) and take the advantage of the low prices. On the other hand, in case thestrike price of the contract is above the market price, then Exxon Mobil can opt for no exercisingthe firm’s option. Exxon Mobil, therefore, shall confine its downside of the premium paid to thewriter of the option, nevertheless, the advantage benefits can go as higher as the surge in thecrude oil prices in the market. Hedging for Foreign Exchange Risk It is obvious that most transactions of Exxon Mobil’s payables occur in USD and solelythe sales in other currencies. The recognized a before tax loss/gain linked to the derivativeinstruments for the period 2016; 2015 and 2016 include -$0.081 billon, $0.039 billion and $0.11billion. Hence, Exxon Mobil should never really wish to hedge the foreign currency exchange
FIN80018 Hedging Strategies - Assignment_2
Exxon Mobil 3risk. The influence brought by the fluctuations in the value of the currency remainsinconsequential to the Exxon Mobil (Pinceel et al. 2015). This is the reason Exxon Mobil rarelyutilizes future contracts, swaps, commodity, currency exchange and forwards in mitigatingagainst the foreign exchange risks. Foreign exchange rate fluctuations thus do not have materialdirect consequences to Exxon Mobil. Derivative for Interest Rate Risk Exxon Mobil holds a floating rate interest payment liability of 1 billion dollars and 11billion dollars of fixed interest bonds. The firm has already engaged in certain initiatives tohedge to get rid of risks that emerge from the fluctuations in the interest rate. The fluctuations inthe basis-point impacts of Exxon Mobil’s debt remains inconsequential to its earnings, cash flowor fair value (White, Li, Griskevicius, Neuberg and Kenrick 2013). The company hasunrestricted access to internally generated funds thus guaranteeing its short-run and long-runliquidity and covering most of the company’s financial needs. Exposures to be Hedged The floating interest payment of the 6 billionthat the firm has to makePercentage proportion to be hedged100%Derivative to be usedU.S. Treasury Bond short futureNo. of derivative contract each hedged6000000000/152.17=39429585 contracts Delivery months for each derivativeDecember 2017Prices at the time of Recommendations$152.17Exxon Mobil will use the interest rate swap whereby it selects to pay the fixed rate ofinterest hence any fluctuations in fair value of swaps does not influence the earnings followingthe balancing off of the fair value fluctuations of hedged debt. The firm will pay the pre-existing
FIN80018 Hedging Strategies - Assignment_3

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