The purpose of this master thesis is to describe and analyze risk management strategies for commodity consuming firms. Some companies do better than others, to protect their operations from the volatility in the different commodity markets. An effective risk management strategy may have important implications on the overall economy and liquidity of a certain firm. It is an area which has been shown at lot of attention recently, some might say, that the speculation, which is driven by the need for additional profits, have contributed to the large increases in commodity prices in recent times. It consists of three parts. The first part describes the commodity and the USD market in general, primary based on oil focused products. This market has, as our thesis shows, a very high degree of volatility and price fluctuations, and with a continuing upwards going trend. We use the available historical data and models to show the price fluctuations, which has had a crucial impact on the cost side of many firms recently, especially in summer of 2008. The second part goes into depth, with how to create an effective management system to observe and implement a risk management system, which actually works. It also shows different kinds of strategies to follow, each one with different levels of outcome and timing. We look at the tools, which can be used, when the need for hedging arrives. Futures, forwards, swaps and options are the basics in this area, and their use is explained. Another important aspect is the information level, which is required of large firms in their annual statements, mostly on the implementation of IFRS 9. The third part is the analysis. We have looked into the risk management strategy of several large firms, incl. Deutsche Lufthansa, SAS & Maersk, and have seen that, they are exposed to different levels of exposure. They all use specialized tools to diversify themselves from this risk, and this affects their incomes and earnings. We then finally look at the future, not only in price terms, but also in technological developments, which in the long run, will make firms more independent on consuming commodities. Hedging, or risk management control, is therefore a very valuable tool to maximize the potential economic gains for a firm, but is has to be used correctly and with an appropriate timing.
|Educations||MSc in Finance and Accounting, (Graduate Programme) Final Thesis|
|Number of pages||135|