Investigating The Business Risks Of Alkane Resources

In 1992, American Barrick produced and sold over 1,280,000 ounces of gold at an average price of $422 per ounce, while the market price was $345 per ounce. If there is no hedging program, American Barrick needs to sell the gold at price $345 per ounce. Hence, the net income and cash flow from operation will be declined to $97.5 million and $205.4 million respectively. (See table I)

A common theory in the oil industry is that the “easy oil” is gone. As known reserves become depleted and production declines, both national oil companies & international oil companies (NOCs and IOCs) are forced to look for oil and gas deposits in more challenging geographical and environmental areas. Andrew George, the chairman of Marsh, an energy risk management company, stated that, “It is fair to say easy oil has gone, and oil and gas are now found in tricky areas. The risk of extraction, or the risk of problem and failure during extraction, is greater” (Mukul, 2012). New wells being drilled are becoming deeper and hotter, resulting in operating conditions in considerably higher formation pressures. It means that operators (oil and gas companies) are drilling and producing in areas that are higher risk, such as deep water (Gaurav, 2004), and environmentally sensitive areas such as the artic (Chazan, 2012).

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.

Klare explores contentious issues in which easily obtained supplies are terminating. Particularly, companies that deal in such resources must turn to the more difficult methods to extract sources of oil, natural gas, and various minerals. This has led to controversial methods such as deep-water oil wells, hydrofracking for natural gas and other energy sources. Also, the acid fracking for copper: which some environmentalists maintain that these methods cause environmental damage and should not be permitted.

Derivative contracts were either negotiated with specific counterparties (over-the-counter) or were standardized contracts executed and traded on an exchange. Negotiated over-the-counter derivatives were comprised of forwards, swaps, and specialized options contracts. Over the counter derivatives can be tailored to meet the customers’ needs with respect to time and quantity and they are not traded in an organized exchange. On the other hand, standardized exchange-traded derivatives consisted of futures and options contracts. Even though over-the-counter derivatives were usually not traded like securities in an exchange, they might be terminated or assigned to an alternative counterparty. Standardized derivatives trade on an exchange and have time and quantity that are fixed.

Klare explores contentious issues in which easily obtained supplies are terminating. Particularly, companies that deal in such resources must turn to the more difficult methods to extract sources of oil, natural gas, and various minerals. This has led to controversial methods such as deep-water oil wells, hydrofracking for natural gas and other energy sources. Also, the acid fracking for copper: which some environmentalists maintain that these methods cause environmental damage and should not be permitted.

BHP Billiton is the world’s top producers of major commodities. China, as BHP Billiton’s largest export market, demand strongly influences the BHP Billiton’s operation (Western Australian Iron Ore Industry Profile 2015). According to the annual report of BHP Billiton (2015), China brought about 36.6% revenue in the amount of total export revenue for BHP Billiton, among the largest product is Iron Ore, which was 66% in 2015. Meanwhile, the forecast of iron ore will continue to increase production. However, Chinese steel consumption may growth slow next few years (shows in figure 1) because the real estate industry decline (Mark 2015). Therefore, oversupply and weaker demand may create the fluctuations in commodity prices which related to commodity risk.

Analyze the risk associated with exchange-traded derivatives, such as futures and options, and what brokers might do to minimize the risk to investors.

E. I. du Pont de Nemours is an American chemical company that has recently acquired the major oil company of Conoco Inc. and is becoming one of the largest chemical manufacturers in the United States. Its financial conservatism has pushed Du Pont to the forefront of the industry as its profitability soared, providing it with the liquidity to readily finance its cash needs. But several competitive conditions posed a challenge to its risk averse financial policy as the 1970's was characteristic of a declining level of industry demand and price, along with rising fuel prices and an economic recession. These pressures now force Du Pont to source its financing through debt, foregoing its risk averse

To create a competitive advantage, a mine has to properly manage its exposure to gold price fluctuations. This is not an easy thing to do since there are so many factors to consider: when, how much, and how to hedge the gold production. Firms in this industry differentiate themselves based on the risk management strategies they implement. Furthermore, mines should also be able to minimize the cost of gold production along with making large sunk costs. Operating in

Nestlé S.A. is a Swiss company and owns a prestigious position being the world’s leading nutrition, health and wellness group (Nestlé, 2016). According to its annual report (2015), this company is exposed to many risks caused by movements in foreign currency exchange rates, interest rate and market prices. The foreign exchange risk comes from transactions and translations of foreign operations in Swiss Francs (CHF). The interest rate risk faces the borrowings at fixed and variable rates. The market price risk comes from commodity price and equity price. The former risk arises from world commodity market for the supplies of coffee, cocoa beans, sugar and others. The later risk arises from the fluctuations of the prices of investments held. (Nestle annual reports, 2015). Thus, financial derivatives instruments are used by this multinational corporation in order to hedge these risks.

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.

There is almost nothing in this world where there is no risk involved. Risk involved is a major topic of concern in everyday life more than ever before. This report gives an overview about the risks involved in everyday life and especially in the oil and gas industry.

Great Eastern Toys is a company in Hong Kong that exports a huge percent of its total sales to the North American and European markets and hence is exposed to currency risk. Previously, the company was occupied with expanding their business and the company 's management had never given much attention to currency risk until their recent meeting with their banker. The banker pointed out that the depreciation of the European currencies during the previous two years had resulted in a substantial loss of income. The company 's management was indeed convinced that they should begin to devote more time and manage their currency position. In this report, we are going to explore the different options for Great Eastern Toys to hedge

Aircraft company use risk management and convene as part of their strategies to lessen the impact of height fuel prices. The important of cost fuel hedging is to decrease a firm’s exposure to sudden changes in the rate of fuel. Consequently, it is to understand the implications of cost and fuel hedging on aircraft company for that the airlines industry is highly energy intensive and jet fuel is a major component of airlines’ operating costs. As well as the high competitive, aircraft company are incapable of pushing on the high fuel costs to passengers by taxing ticket higher airlines price, lower operating profit.