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Bachelor thesis

Saudi Arabia : too big to hedge?

    2018

Mémoire de bachelor: Haute école de gestion de Genève, 2018

English Oil prices reached low levels in 2016. As a consequence, many countries dependent on oil revenues experienced significant budget deficits. Saudi Arabia, for which oil revenue accounts for more than 80% of national income, chose to implement a fiscal reform to reduce its oil dependency. Although fiscal reform is a good strategy for the long run, the solution does not take into account price risk; a risk the national oil company faces every day. While Saudi Arabia is pursuing fiscal reform, Mexico and some private-owned oil producers have been implementing hedging strategies to minimize their risks and secure revenues. This research paper analyzes the derivatives instruments available in the market and the management practices of a US shale company, an oil supermajor as well as the Norwegian and the Mexican national oil companies to explain the trade-offs of derivatives instruments. To evaluate the feasibility of a hedging strategy for Saudi Arabia, derivatives markets size has been assessed. Markets have displayed enough liquidity to support large deals. However, the analysis has shown that large deals need to be undertaken through multiple transactions and large investment banks. Moreover, the important role of Saudi Arabia within OPEC and the implications of the Aramco IPO were essential points considered to reach a decision on feasibility. Comprehensive analysis has been undertaken on PEMEX, the Mexican national oil company which transfers its commodity price risks to Mexico. Mexico has been implementing a hedging program since 2008 called the Hacienda Hedge in which the country buys put options. Over fifteen years, the country has exercised their options only three times. This study explains how the Hacienda Hedge is constructed and why the country is pursuing this strategy despite the low execution rate of the hedging program. The Norwegian oil company has set the path on which Aramco is potentially heading. Saudi Arabia has a lot to learn from the Scandinavian country such as operations restructuring due to the IPO. The findings could not bring forward any argument against the case for Saudi Arabia to engage in hedging operations The variety of instruments available offers hedging possibilities for companies of various size and structure.
Language
  • English
Classification
Economics
Notes
  • Haute école de gestion Genève
  • International Business Management
  • hesso:hegge
License
License undefined
Identifiers
  • RERO DOC 323570
Persistent URL
https://sonar.ch/hesso/documents/314814
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