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Abstract:
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This master thesis studies Det Norske Oljeselskaps ASA’s need for a risk
management tool to deal with market risk and investigates the characteristics of the
company’s different market risk exposures and the option to alter the risk exposures
through the use of financial derivatives. Throughout the master thesis a management
tool which identifies, quantifies and manages the company’s exposure to market risk
was created. The purpose of the tool is to enhance the foundation of which the
management takes decisions on whether to keep, reduce or eliminate market risk.
In contrast to the conclusions of classic capital market theory, imperfections in real
world capital markets create a rationale for lowering the volatility of cash flows
through hedging. A company is not in control of fluctuations in the market rates, and
these fluctuations can exercise significant impact on the company’s cash flows. In the
analysis of Det Norske Oljeselskap both a strategic and economic rationale for
implementing a financial risk management tool were identified. By using the
CorporateMetrics framework as methodology for creating a risk management tool, a
complete analysis of the market risk is conducted, taking into account a full range of
probability-weighted market outcomes as well as the integration of the identified
market risks across different markets – commodities, foreign exchange and interest
rates. Through the use of parametric modelling and Monte Carlo simulation, a model
that quantifies Det Norske Oljeselskaps exposure to market risk over the next three
months was created and validated. The company’s total exposure is communicated
through one single risk measure, Cash Flow at Risk.
To clarify the management’s options to manage the quantified market risk, twentyfive
possible hedging strategies using financial derivatives were investigated, and an
analysis of expected return for different risk levels was conducted. On the basis of
this analysis Det Norske Oljeselskap can now assess the different risk levels and
make efficient use of their risk taking capacity. |
