Risk Management At Apache Case Study Solution
Cash Flows at 5% Confidence level
The cash flows calculated in the excel shows that with a 5% confidence level the cash flows of the company would be declined by $ 1622540 as shown in the excel spreadsheet.
The company’s debt level and debt service i.e. interest and principal payments can be declined drastically due to the price fluctuations. It could result in increase in company’s debt levels and make the company unable to pay back its debt obligations. (Unknown, 2011)
Evaluation of Current and Future Strategy
The company is currently hedging its 28/48 output and is planning to continue the strategy. This strategy would result in increasing its revenue from hedging as seen in the excel spreadsheet. If the company would focus in hedging all of its production, it would be able to gain more revenues and reduce commodity price risks. However, there are certain risks attached to hedging as stated above which the company would have to face in the future.
Recommendations
As a member of Apache, it is recommended to the company to continue its current strategy with hedging ratio for output of 28/48. Although, hedging could result in more revenues in case the prices are declined, but there are certain risks attached with hedging commodity risk. Therefore, the company should continue the current strategy and should only hedge a part of its total output........
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