Managing Commodity-linked Revenues and Currency Risk

Stanley Myint and Fabrice Famery

Contents

Foreword

Introduction

1.

Theory and Practice of Corporate Risk Management

2.

Theory and Practice of Optimal Capital Structure

3.

Introduction to Funding and Capital Structure

4.

How to Obtain a Credit Rating

5.

Refinancing Risk and Optimal Debt Maturity

6.

Optimal Cash Position

7.

Optimal Leverage

8.

Introduction to Interest Rate and Inflation Risks

9.

How to Develop an Interest Rate Risk Management Policy

10.

How to Improve Your Fixed-Floating Mix and Duration

11.

Interest Rates: The Most Efficient Hedging Product

12.

Do You Need Inflation-linked Debt?

13.

Prehedging Interest Rate Risk

14.

Pension Fund Asset and Liability Management

15.

Introduction to Currency Risk

16.

How to Develop Currency Risk Management Policy

17.

Translation or Transaction: Netting Currency Risks

18.

Early Warning Signals

19.

How to Hedge High Carry Currencies

20.

Currency Risk on Covenants

21.

Optimal Currency Composition of Debt 1: Protect Book Value

22.

Optimal Currency Composition of Debt 2: Protect Leverage

23.

Cyclicality of Currencies and Use of Options to Manage Credit Utilisation

24.

Managing the Depegging Risk

25.

Currency Risk in Luxury Goods

26.

Introduction to Credit Risk

27.

Counterparty Risk Methodology

28.

Counterparty Risk Protection

29.

Optimal Deposit Composition

30.

Prehedging Credit Risk

31.

xVA Optimisation

32.

Introduction to M&A-related Risks

33.

Risk Management for M&A

34.

Deal-contingent Hedging

35.

Introduction to Commodity Risk

36.

Managing Commodity-linked Revenues and Currency Risk

37.

Managing Commodity-linked Costs and Currency Risk

38.

Commodity Input and Resulting Currency Risk

39.

Offsetting Carbon Emissions

40.

Introduction to Equity Risk

41.

Hedging Dilution Risk

42.

Hedging Deferred Compensation

43.

Stake-building

This chapter is the first in which we investigate commodity risk. In our example, commodity risk is inextricably linked to the currency risk and the risk manager has to consider them both at the same time. The commodity risk impacts company’s revenues and the company has decided not to hedge it for two main reasons. First, like many other commodity producers, our company believes that shareholders want to have exposure to the main commodity produced. If they no longer want this exposure, they can either sell the shares or hedge the commodity exposure directly. The other reason is that, through the company’s day-to-day operations, it gathers intelligence on the commodity price that allows it to forecast and plan for periods of higher volatility. On the other hand, currency risk is different because it is not specific to the company, and arguably is not the primary reason why the shareholders would buy any of the company’s stock.

BACKGROUND

Oilco is based in Russia. The company has a broad international client base and sells oil and related products across the world. As is common in this industry, the oil is traded in USD and Oilco, which reports in USD, therefore faces a double

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