Suppose you are a risk management professional working for iManageRisk firm which is located in Melbourne. iManageRisk provides consulting services to firms such as airline companies and mining companies on their risk management. Mr. Robert Lee, the treasurer of Hilditch Pte Ltd, approaches you today (assume it is now March 2020) to ask you for advice on the financial risk management of his company.

Hilditch (Australia) Pte Ltd is mining company which specializes in base oils, fuels and other refined oil products. In the decades, Hilditch has grown and evolved to supply many more products and services to markets around the world. Hilditch trades with groups in Korea, Japan, China, Singapore, Indonesia, Thailand, Malaysia, Taiwan, United Kingdom, Europe, South Africa, USA and of course Australia. As a growth company, Hilditchs reveue is positively related to oil price and it aims to a growing cash flow from expanding oil trading operations and seeking to define up to 20 million gallons of jet fuel.

The companys profit and loss is subject to many risk factors, such as the price change of oil, foreign exchange rate fluctuations and the macroeconomic conditions. As the market price of oil is quite volatile, the company is considering using some strategies to manage its risk exposure. One way to hedge these exposures is to use futures contracts. For instance, the futures contracts traded in the NYMEX.

please address the following questions.

1) Outline the potential financial risks and operational risks faced by Hilditch and explain these risks in details.

2) Explaining the impact of current macroeconomic conditions to Hilditchs business, in your discussion, please include the discussion of at least two news items listed in Appendix 1.

3) Please devise a hedging strategy for Hilditch:

a. What position should it take if Hilditch wants to use crude oil futures to hedge the exposure?

b. What is the optimal hedge ratio?

c. What is the optimal number of futures contracts with tailing of the hedge?