Specific Hedging Strategies of Exxon Mobil †MyAssignmenthelp.com

Question: Discuss about the Specific Hedging Strategies of Exxon Mobil. Answer: Specific Hedging Strategies Derivative for Commodity Risk Exposure The following particulars are demonstrative of the exposure that shall be hedged via the utilization of the recommended derivative, the CME Crude Oil call options contract. Exposures to be Hedged Cost of purchasing the crude oil USD 1.04 B Percentage proportion to be hedged Fifty percent (50%) Derivative to be used CME Crude Oil Options Contract No. of derivative contract each hedged 10400000000/27=385185185 contracts Delivery months for each derivative December 2017 Prices at the time of Recommendations 27USD The companys engagement in the call option will allow Exxon Mobil to hedge the firms position changes in the crude oil prices. Via the purchase of the call option, in case the strike price are beneath the market prices, Exxon Mobil will be able to exercise the option at the expiry date (December 2017) and take the advantage of the low prices. On the other hand, in case the strike price of the contract is above the market price, then Exxon Mobil can opt for no exercising the firms option. Exxon Mobil, therefore, shall confine its downside of the premium paid to the writer of the option, nevertheless, the advantage benefits can go as higher as the surge in the crude oil prices in the market. Hedging for Foreign Exchange Risk It is obvious that most transactions of Exxon Mobils payables occur in USD and solely the sales in other currencies. The recognized a before tax loss/gain linked to the derivative instruments for the period 2016; 2015 and 2016 include -$0.081 billon, $0.039 billion and $0.11 billion. Hence, Exxon Mobil should never really wish to hedge the foreign currency exchange risk. The influence brought by the fluctuations in the value of the currency remains inconsequential to the Exxon Mobil (Pinceel et al. 2015). This is the reason Exxon Mobil rarely utilizes future contracts, swaps, commodity, currency exchange and forwards in mitigating against the foreign exchange risks. Foreign exchange rate fluctuations thus do not have material direct consequences to Exxon Mobil. Derivative for Interest Rate Risk Exxon Mobil holds a floating rate interest payment liability of 1 billion dollars and 11 billion dollars of fixed interest bonds. The firm has already engaged in certain initiatives to hedge to get rid of risks that emerge from the fluctuations in the interest rate. The fluctuations in the basis-point impacts of Exxon Mobils debt remains inconsequential to its earnings, cash flow or fair value (White, Li, Griskevicius, Neuberg and Kenrick 2013). The company has unrestricted access to internally generated funds thus guaranteeing its short-run and long-run liquidity and covering most of the companys financial needs. Exposures to be Hedged The floating interest payment of the 6 billion that the firm has to make Percentage proportion to be hedged 100% Derivative to be used U.S. Treasury Bond short future No. of derivative contract each hedged 6000000000/152.17=39429585 contracts Delivery months for each derivative December 2017 Prices at the time of Recommendations $152.17 Exxon Mobil will use the interest rate swap whereby it selects to pay the fixed rate of interest hence any fluctuations in fair value of swaps does not influence the earnings following the balancing off of the fair value fluctuations of hedged debt. The firm will pay the pre-existing floating rate debt utilizing the variance between the variable and fixed floating rate payments (Martinez-Garcia and Tarnita 2017). The firm will not exercise the future rather it shall close its position few days before the final expiry data. The short future contract shall be marked to the market and the firm shall assess the gains each day. The forecasts with respect to interest rate indicate precisely that the interest rate could in the future stay unchanged or surge. In case of constant interest rate, the firms risk shall be hedged. On the contrary, the firm will make a gain in case the interest rate surges by making future contract to the market thereby receiving value in access. In either case, the downside risk of the company is restrained via the investment in the short future in US Treasury Bond. Derivative for Liquidity Risk It is recommended that the Exxon Mobil must hedge with future cash flows contracts whereby the company will purchase more assets in gas as well as refining to make future cash flows to the business (Guo 2017). By engaging in the capital spending or purchasing new offshore oil drilling equipment, the firm shall be seeking to complement the liquidity structure and the liquidity hedging portfolio in the firms future cash flows. Exposures to be Hedged The short term non derivative based liquidity payment which the company has to make Percentage proportion to be hedged 100% Derivative to be used US Treasury Bond put option No. of derivative contract each hedged 42500000000/152.17=279292896 contracts Delivery months for each derivative December 2017 Prices at the time of Recommendations $152.17 Exxon Mobil has held a position in the put option thereby guaranteeing ownership of assets when the debt matures. The Exxon Mobil has a stronger projection with respect to the surge in the interest rates of country. Where there is a surge in the rates of interest, Exxon Mobil would solely secure a position to pay off the firms debt, however, the firm will further make a gain via the option settlement. Is the company adequately hedged? In my view, Exxon Mobil is sufficiently hedged. Why or why not? The firm has already engaged in hedging in the areas that required the hedging adequately. It is clear from the examination above that the firm has hedged in liquidity risk, interest risk and commodity price risks. In my view, the Exxon Mobil has not hedged only in foreign exchange risk but this is a good and convincing reason not hedging this risk. The reason being that the impact of such a risk remains immaterial to the firm as most of the transactions take place in the country except sales. In this sense, the variation in other countries currency has no bet effect on the Exxon Mobil and hence the needless to hedge in the foreign exchange rate. The firm will have nothing to lose by not hedging this risk and it can be said that the Exxon Mobil is fully and adequately hedge as a strategy to mitigate the risks associated with its operations (Dong, Kouvelis and Su 2014). What are your recommendations? It is recommended that Exxon Mobil undertake the hedging strategies already recommended in this paper based on the analysis as presented in the table to mitigate the risk associated with its operations. The firm has a broader operations as it deals in various economies which increasingly expose it to various financial risk. Exxon Mobil has made feasible policies for hedging such risks that confronts the business. Nevertheless, Exxon Mobil still has ineffective exposure to particular risks. The present riskmanagement strategies adopted by Exxon Mobil have significantly managed to mitigate the risks. Nevertheless, Exxon needs to embrace the strategies mentioned in the analysis to further improve the firms position and decrease the exposure to various kind of the financial risk confronting the business. References Dong, L., Kouvelis, P. and Su, P., 2014. Operational hedgingmanagement strategies and competitive exposure to exchange rates. International Journal of Production Economics, 153, pp.215-229. Guo, J.H., 2017. Hedging strategies for European contingent claims with the minimum shortfall risk criterion. Journal of Interdisciplinary Mathematics, 20(3), pp.637-647. Martinez-Garcia, R. and Tarnita, C.E., 2017. Seasonality can induce coexistence of multiple bet-hedging strategies in Dictyostelium discoideum via storage effect. Journal of Theoretical Biology. Pinceel, T., Vanschoenwinkel, B., Deckers, P., Grgoir, A., Ver Eecke, T. and Brendonck, L., 2015. Early and late developmental arrest as complementary embryonic bet-hedging strategies in African killifish. Biological journal of the Linnean Society, 114(4), pp.941-948. White, A.E., Li, Y.J., Griskevicius, V., Neuberg, S.L. and Kenrick, D.T., 2013. Putting all your eggs in one basket: Life-history strategies, bet hedging, and diversification. Psychological Science, 24(5), pp.715-722.