Sydney University Oil Hedging and Incremental Risks Essay
Question Description
A oil refinery has been asked to hedge its refining margins. This means that they would buy crude oil on a futures or forward basis, and would sell oil products on a futures or forward basis simultaneously in order to lock in a spread and secure the profitability of the company. Youve been hired by the company as a risk management consultant. The CEO has asked you to evaluate the lenders recommendation. Please use no more than one page to answer the following questions
- What incremental risks might hedging create for the company?
- Can those risks be mitigated? If yes, then how?
- How would the risks be quantified?
- How would you advise the CEO to determine the companys optimal hedging policy?
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