Statoil, the national company in Norway, is a large, sophisticated, and active participant in both the currency and petrochemical markets. Although it is a Norwegian company, because it operates within the global oil market, it considers the U.S. dollar ($), rather than the Norwegian krone (Nok), as its functional currency. Ari Karlsen is a currency trading strategist for Statoil. a) Statoil sold 1 million barrels of crude oil to the Norwegian petrol station chain, Circle K, today for 120 Nok per barrel (Nok denotes the Norwegian Krone). Statoil expects to receive the full payments from Circle K in 3 months’ time when the crude oil is delivered to Circle K’s facilities in Norway. Statoil is informed that Circle K will pay for the oil in Norwegian Krone. Ari is asked by the Chief Financial Officer (CFO) about the strategy to reduce the uncertainty around the expected payment from Circle K. Ari is faced with the following market rates: (Image attached as Q2a - table 4 by 2) Based on the above information, what hedging strategy should Ari advise the CFO that works the best for Statoil? Explain why Ari should choose such hedging strategy. How much U.S. dollar will Statoil receive at the end of 3 months by using this hedging strategy?
Please answer this ONE question on Foreign Exchange markets
Statoil, the national company in Norway, is a large, sophisticated, and active participant in both the currency and petrochemical markets. Although it is a Norwegian company, because it operates within the global oil market, it considers the U.S. dollar ($), rather than the Norwegian krone (Nok), as its functional currency. Ari Karlsen is a currency trading strategist for Statoil.
a) Statoil sold 1 million barrels of crude oil to the Norwegian petrol station chain, Circle K, today for 120 Nok per barrel (Nok denotes the Norwegian Krone). Statoil expects to receive the full payments from Circle K in 3 months’ time when the crude oil is delivered to Circle K’s facilities in Norway. Statoil is informed that Circle K will pay for the oil in Norwegian Krone. Ari is asked by the Chief Financial Officer (CFO) about the strategy to reduce the uncertainty around the expected payment from Circle K. Ari is faced with the following market rates:
(Image attached as Q2a - table 4 by 2)
Based on the above information, what hedging strategy should Ari advise the CFO that works the best for Statoil? Explain why Ari should choose such hedging strategy. How much U.S. dollar will Statoil receive at the end of 3 months by using this hedging strategy?
Exchange rate is the value of one country’s currency in exchange of other country’s currency.
Hedging strategies will be used to reduce the risk due to fluctuations in exchange rate.
A should advise that 3-month forward rate agreement works the best.
To know whether it works or not, 3-month expected exchange rate should be determined.
Spot rate in 3 months (forward rate as per interest rates) as per the interest rates can be calculated as follows:
The calculated forward rate as per the interest rates (Nok6.023/$) is higher than given 3-month forward rate (Nok6.0186$). Hence, if the spot rate in three months is Nok6.0230, less U.S. dollars will be received at (Nok6.0230). Under, given 3-month forwarded rate, more U.S. dollars can be received. Hence, hedging strategy of buying the forward rate agreement should be chosen.
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