Financial Risk Management Accounting, Finance, SPSS Coursework (Coursework Sample)
Task: Answering a case scenario
About the sample: The paper makes recommendations on the suitable derivatives to avert changes in fuel prices
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Part A: Case Scenario
Question (a)
EZY Adelaide’s major expense is fuel. Since the prices of fuel correlates strongly with AUD/USD currency fluctuations and USD oil prices, I disagree with the CEO that the service station chain is not exposed to this risk. As the CFO, I recommend that fuel prices be locked for the next six months since the forecasts indicate a possible rise in oil prices. For example, if fuel is currently selling at spot price of $100 per barrel and may rise to $120 in the next six months, EZY Adelaide may have to enter into a forward contract with the supplier at the current $100 per barrel price. In six months, the forward contract will be worth $20 per barrel while the cost of fuel remains at $100. The benefit of the forward-market hedge is that regardless of what happens to the exchange rate, EZY Adelaide will receive the same dollar amount of fuel for $100 per barrel.
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