Business

Multinational Business Finance

Task 2: Advice to CEO

Futures contracts in order to hedge risk

From the given scenario, it is found that Airline is expanding its service over the world. In this process, the company will face various risks in which financial risk is major. It is because price of the oil fluctuate continuously. Due to this, it is possible that company can face issue in the business operation as increasing the price of crude oil. Typically, it can be seen that price of the crude oil change each moment that affect the various industries. In the same concern of this, airline is also an industry that is greatly depended on the oil price in the international market (Stefani & Tiberti, 2016). The profitability and price of the service of airline depend on the oil price. It can be seen that an increase in the price of oil makes expensive the airline service and minimizes its profitability. Hence, to manage this kind of in the business process, it can be suggested to the CEO of Airline that it can focus on the future contract with the oil suppliers. It will allow Airline to get oil at the constant price for a particular time period. It will help the CEO to reduce the risk of increasing the crude oil price in the international market. It will also to reduce the financial loss that can happen due to increase in the oil price (Hillman and Goldberg, 2014).

Advantages and disadvantages

The use of the future contract in the business process can be beneficial for Airline because the main aim of the using the future contract in the business scenario is to decline the risk of the counter party. It helps the company to minimize the risk of financial loss due to change in the price of product in future. It provides the equal benefits to the both parties and counties in the business and sales of good and service process. In the business environment, Hedge contains those products that are associated with the risk of change in the price in future. In additional, execution cost in the future contract is also low that is also an advantage. Therefore, future contract helps to firm to get benefit after the increase of cost because it allows the firm to get the product at the determined price after the increase in the price (Meng, 2017). Future contract also helps main the level of the inventory in the stock that helps to maintain the liquidity of the company. But still having in the lost of advantage, the future contract also have the some limitation such it is only based on the USA exchange rate. Moreover, it is not helpful for small traders and shopkeepers.

Potential impacts on business liquidity affecting ongoing operations

In the business process to have a future contract as the business deal has the significant influence on the liquidity position of the company. Airline will confirm flight for thousand of person each day and raise a huge amount from them. It will improve Airline liquidity position as well as it will pay only determined price of the oil. Additionally, it can increase its flight price for customers when price of oil will increase that will provide extra benefit as improving liquidity (Momberg and Vogenauer, 2017).

References

Hillman, R.A. and Goldberg, V.P. (2014) Drafting Our Future: Contract Law In 2025 Symposium Articles. Duquesne Law Review, 52(2).

Meng, M. (2017) Recent China Food and Drug Administration reform: impact on the present and future of bioanalytical contract research organization laboratories in China. Bioanalysis, (00).

Momberg, R. and Vogenauer, S. eds. (2017) The Future of Contract Law in Latin America: The Principles of Latin American Contract Law. UK: Bloomsbury Publishing.

Stefani, G., & Tiberti, M. (2016) Multiperiod optimal hedging ratios: methodological aspects and application to a wheat market. European Review of Agricultural Economics, 43(3), pp. 503-531.

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