Financial hedging of oil in South African organisations
Date
2012-10-08
Authors
Milambo, Oliver
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Abstract
Crude oil is, without doubt, the most important physical commodity as it provides
mankind the energy for transportation, industrial and residential use. As a result, it
is not surprising that crude oil is the world’s most actively traded commodity. The
importance of oil and its extreme price volatility has increased demand for risk
management operations and oil industry participants have resorted to the use of
derivatives to reduce their exposure.
This research seeks to explore the hedging of oil in South African organisations.
The study explores the motive for hedging fuel, the type of instruments used to
hedge the fuel, the importance of formal hedging policies and the use of software
in enforcing controls and ensuring an appropriate level of oversight in the
execution and reporting of hedging activities.
Data gathering consisted of semi-structured interviews with senior personnel
involved in hedging within their organisations. The research objective was broken
down into a number of propositions derived from the literature review.
The results showed strong support for the proposal that South African
organisations hedge to protect the fuel price risk, thereby managing the cash
flows. There was also strong evidence that organisations use swaps and over the
counter (OTC) traded options. However, there was little support for the use of
exchange traded instruments.
South African companies consider formal policies and procedures as critical for
their hedging activity. The majority of the companies in the study valued the use
of software tools for the execution and management of hedges to ensure a fit with
the company’s goals and risk management policy. More companies used inhoused
developed software as opposed to purchased derivatives software.
Description
MBA thesis - WBS
Keywords
Hedging, Financial hedging, Oil industry