Call Options ( Caps )

Options strategies share a similar defect with forward sales. That is the weakness of getting the maximum profits that are available when the price goes up or indeed has the potential to rise. “By adjusting the exercise prices and ratios of puts and calls, American Barrick could determine the degree to which it chose to participate in gold price sales”. However, options contracts are usually not longer than 5 years and only contracts with maturities under 2 years have high liquidity. Thus, the time spread of it is far shorter than the 20 years of expected production currently in reserve. Taking these factors into consideration, we think options contracts are good for American Barrick to hedge risk in short-term period.

The low price elasticity of demand for household energy given the lack of easy alternatives means that consumers will continue to purchase it even when prices rise drastically as we can see from extract A they did over the three year period. Furthermore the complex pricing structures in the energy market make it difficult for consumers to exercise any consumer sovereignty because they lack the information or indeed don’t know how to interpret it, to make a decision which is in their best interest.

In today’s society, everyone seems to be in a rush. Convenience trumps nearly anything and everything. The closest and the promptest option is the one we often lean toward, regardless of the consequence or cost. One of the biggest convenience items within the 21st Century is gasoline. Regardless of the price, we often purchase this item at the most suitable site and time, especially when we are in desperate need of the item. Gasoline companies are alert that convenience is ideal; therefore, they alter gas prices to obtain the greatest amount of business.

Stock options are another main concern and are based upon the performance of a company. A lot of companies are in a low return and low compensation which then caused bad business and it’s about 400 times that amount. I believe the government is trying to tighten down on excessive executive compensation with implementing salary caps. Executives are unrealistic with common life and way of living therefore; they do not take any consideration with the underdogs of the company or the world. The economy does have hope but it’s a long way from being stabilized once again.

From the recent case data, ExxonMobil has not acted irresponsibility in pricing its gasoline products. Outside of the grocery industry, I have not heard of any business segments surviving on less than a 5% profit margin. In reading that ExxonMobil reported only a net profit of 8.5%3, it is difficult to state that the firm over priced its products to reap abnormal profits. Although Mr. Lee Raymond’s $400 million retirement seems grossly out of proportion in utilitarian terms, adding these funds back into the firm’s bottom line would not change the profit results. With profit margins of less than 10%, it is unlikely that ExxonMobil would be able to keep the price of gasoline fixed if sweet crude oil were to increase from $80 per barrel to $88. This 10% increase in raw material cost would have to be passed through to the customer in the form of higher prices for the firm to survive.

We believe that this hedge strategy would be an effective way for Dozier to guarantee themselves a range of possible profits. It would not allow them to reach their desired 6% profit margin; however they would be guaranteed to at least make 1.433% and could very well make more on this project. There is however a large catch; these options expire in March and we will not be paid our receivable until 4/13/86. That means as soon as these options expire Dozier effectively has no hedge on the receivable for a month. They would be exposed to the same currency risk of the exchange rate decreasing as before they implemented the options hedge. In reality this hedge would be very ineffective. However, if we were given quotes on options that expired in April, we could create a very similar strategy just with different prices for the corresponding puts and calls. This would still result in a similar guaranteed profit range.

A large portion of the market participants pay the distribution network companies to transmit electricity and gas to ending retail customers. Origin acts as not only an energy producer but a trader that offer power directly in the electricity market. To offset potential variation in supply costs, market players often use hedging activities to manage the relevant risks. The hedging activities can easily effect on the assumptions in many valuation of accounts in the financial statement, thus auditors should take adequate concern on these activities.

At a deeper level it can make fuels lead to the growth of auto industry. Aside from this fact as well it can boost up the American

* Hedging. Hedging with the fuel market could save enough money in one year to offset the next year’s fuel supply and costs.

To keep customers updated with status of activity in response to their query and questions as well as oil quality and maintenance information.

“Any increases in the price of oil in the U.S. or in our other markets or any sustained shortage of oil, including as a result of political instability in the Middle East and African nations, could weaken the demand for such vehicles, which could reduce our market share in affected markets, decrease profitability, and have a material adverse effect on our business.” Page 26

Most firms hedge at least some of their risks. Hedging can take two basic forms—namely, natural hedging and hedging by means of derivative instruments. The use of derivatives as hedges has expanded greatly in recent years.

In the past the market risk was hedged by shorting or short-selling representative shares of the market index In the past the market riskunder was The alternative hedged by shorting hedging the consideration was or shortselling representativehelp of put market risk with the shares of the market the market index options on index

From its definition it can be noticed that hedging is a strategy employed by companies in an effort to safeguard their economic position and to prevent the company from the losses which are associated with the unforeseen risks. Companies can hedge against risks which are associated with losses by taking control of their future purchases. The commodity prices vary in different markets and are caused or influenced by different economic factors. Some commodities are very scarce and with the increased depletion subject to the global demand in different foreign markets, the prices are set to be hiked in response to the established demand which positions the companies that use those particular commodities to have cash flow problems.

Furthermore it is possible to buy and sell European option contracts, an option gave the holder the right to buy or sell the underlying futures contract at a predetermined price.