3final Project

8/6/2019 3final Project

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CHAPTER 1


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1.1 INTRODUCTION

Hedging:

Derivatives allow risk related to the price of the underlying asset to be transferred from

one party to another. For example, a wheat farmer and a miller could sign a futures

contract to exchange a specified amount of cash for a specified amount of wheat in the

future. Both parties have reduced a future risk: for the wheat farmer, the uncertainty of

the price, and for the miller, the availability of wheat. However, there is still the risk that

no wheat will be available because of events unspecified by the contract, such as the

weather, or that one party will renege on the contract. Although a third party, called a

clearing house, insures a futures contract, not all derivatives are insured against counter-

party risk.

From another perspective, the farmer and the miller both reduce a risk and acquire a risk

when they sign the futures contract: the farmer reduces the risk that the price of wheat

will fall below the price specified in the contract and acquires the risk that the price of

wheat will rise above the price specified in the contract (thereby losing additional income

that he could have earned). The miller, on the other hand, acquires the risk that the price

of wheat will fall below the price specified in the contract (thereby paying more in the

future than he otherwise would have) and reduces the risk that the price of wheat will rise

above the price specified in the contract. In this sense, one party is the insurer (risk taker)

for one type of risk, and the counter-party is the insurer (risk taker) for another type of

risk Hedging also occurs when an individual or institution buys an asset (such as a

commodity, a bond that has coupon payments, a stock that pays dividends, and so on) and

sells it using a futures contract. The individual or institution has access to the asset for a

specified amount of time, and can then sell it in the future at a specified price according

to the futures contract. Of course, this allows the individual or institution the benefit of

holding the asset, while reducing the risk that the future selling price will deviate

unexpectedly from the market's current assessment of the future value of the asset.


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Derivatives traders at the Chicago Board of Trade

Derivatives can serve legitimate business purposes. For example, a corporation borrows a

large sum of money at a specific interest rate. The rate of interest on the loan resets every

six months. The corporation is concerned that the rate of interest may be much higher in

six months. The corporation could buy a forward rate agreement (FRA), which is a

contract to pay a fixed rate of interest six months after purchases on a notional amount of

money. If the interest rate after six months is above the contract rate, the seller will pay

the difference to the corporation, or FRA buyer. If the rate is lower, the corporation will

pay the difference to the seller. The purchase of the FRA serves to reduce the uncertainty

concerning the rate increase and stabilize earnings.

Speculation and arbitrage

Derivatives can be used to acquire risk, rather than to insure or hedge against risk. Thus,

some individuals and institutions will enter into a derivative contract to speculate on the

value of the underlying asset, betting that the party seeking insurance will be wrong about

the future value of the underlying asset. Speculators look to buy an asset in the future at a

low price according to a derivative contract when the future market price is high, or to

sell an asset in the future at a high price according to a derivative contract when the

future market price is low.

Individuals and institutions may also look for arbitrage opportunities, as when the current

buying price of an asset falls below the price specified in a futures contract to sell the

asset.

Speculative trading in derivatives gained a great deal of notoriety in 1995 when Nick

Leeson, a trader at Barings Bank, made poor and unauthorized investments in futures

contracts. Through a combination of poor judgment, lack of oversight by the bank's

management and regulators, and unfortunate events like the Kobe earthquake, Leeson

incurred a US$1.3 billion loss that bankrupted the centuries-old institution.


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OTC and exchange-traded

In broad terms, there are two groups of derivative contracts, which are distinguished by

the way they are traded in the market:

Over-the-counter (OTC) derivatives are contracts that are traded (and privately

negotiated) directly between two parties, without going through an exchange or other

intermediary. Products such as swaps, forward rate agreements, and exotic options are

almost always traded in this way. The OTC derivative market is the largest market for

derivatives, and is largely unregulated with respect to disclosure of information between

the parties, since the OTC market is made up of banks and other highly sophisticated

parties, such as hedge funds. Reporting of OTC amounts are difficult because trades can

occur in private, without activity being visible on any exchange. According to the Bank

for International Settlements, the total outstanding notional amount is US$684 trillion (as

of June 2008). Of this total notional amount, 67% are interest rate contracts, 8% are credit

default swaps (CDS), 9% are foreign exchange contracts, 2% are commodity contracts,

1% are equity contracts, and 12% are other. Because OTC derivatives are not traded on

an exchange, there is no central counter-party. Therefore, they are subject to counter-

party risk, like an ordinary contract, since each counter-party relies on the other to

perform.

y Exchange-traded derivative contracts (ETD) are those derivatives instrumentsthat are traded via specialized derivatives exchanges or other exchanges. A

derivatives exchange is a market where individuals trade standardized contracts

that have been defined by the exchange. A derivatives exchange acts as an

intermediary to all related transactions, and takes Initial margin from both sides of

the trade to act as a guarantee. The world's largestderivatives exchanges (by

number of transactions) are the Korea Exchange (which lists KOSPI Index

Futures & Options), Eurex (which lists a wide range of European products such as

interest rate & index products), and CME Group (made up of the 2007 merger of

the Chicago Mercantile Exchange and the Chicago Board of Trade and the 2008

acquisition of the New York Mercantile Exchange). According to BIS,


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theCombined turnover in the world's derivatives exchanges totaled USD 344

trillion during Q42005. Some types of derivative instruments also may trade on

traditional exchanges. For instance, hybrid instruments such as convertible bonds

and/or convertible preferred may be listed on stock or bond exchanges. Also,

warrants (or "rights") may be listed on equity exchanges. Performance Rights,

Cash xPRTs and various other instruments that essentially consist of a complex

set of options bundled into a simple package are routinely listed on equity

exchanges. Like other derivatives, these publicly traded derivatives provide

investors access to risk/reward and volatility characteristics that, while related to

an underlying commodity, nonetheless are distinctive.

Common derivative contract type:

There are three major classes of derivatives:

1. Futures/Forwards are contracts to buy or sell an asset on or before a future date ata price specified today. A futures contract differs from a forward contract in that

the futures contract is a standardized contract written by a clearing house that

operates an exchange where the contract can be bought and sold, whereas a

forward contract is a non-standardized contract written by the parties themselves.2. Options are contracts that give the owner the right, but not the obligation, to buy

(in the case of a call option) or sell (in the case of a put option) an asset. The price

at which the sale takes place is known as the strike price, and is specified at the

time the parties enter into the option. The option contract also specifies a maturity

date. In the case of a European option, the owner has the right to require the sale

to take place on (but not before) the maturity date; in the case of an American

option, the owner can require the sale to take place at any time up to the maturity

date. If the owner of the contract exercises this right, the counter-party has the

obligation to carry out the transaction.

3. Swaps are contracts to exchange cash (flows) on or before a specified future datebased on the underlying value of currencies/exchange rates, bonds/interest rates,

commodities, stocks or other assets.More complex derivatives can be created


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bycombining the elements of these basic types. For example, the holder of a

swaption has the right, but not the obligation, to enter into a swap on or before a

specified future date.

Hedging:

Hedging is the process of managing the risk of price changes in physical material by

offsetting that risk in the futures market. Hedging can vary in complexity from a

relatively simple activity, through to highly complex strategies, including the use of

options.

The ability to hedge means that industry can decide on the amount of risk it is prepared to

accept. It may wish to eliminate the risk entirely and can generally do so quickly and

easily using the LME.

Managing price risk means achieving greater control of either the cost of inputs, or

revenues from sales, or both; planning for the future based on assured costs and revenues;

and eliminating concerns that a sharply adverse move in the price of material could turn

an otherwise flourishing and efficient business into a loss maker.

Hedging by trade and industry is the opposite of speculation and is undertaken in order to

eliminate an existing physical price risk, by taking a compensating position in the futures

market. Speculators come to the futures market with no initial risk. They assume risk by

taking futures positions.

Hedgers reduce or eliminate the chance of further losses or profits, while the speculators

risk losses in order to make profits.

Before starting a hedging programme it is essential to assess the risk due to exposure to

the price of physical material. Once the hedger has an understanding of the tools

available at the LME, it is relatively easy to select the appropriate action to manage this


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risk. It is important that this action is properly managed at all times and that the

appropriate controls and approval procedures are in place.

It is generally advisable to work with an LME broker so that expert advice can be taken

in devising a hedging programme.

Fuel Hedging is a contractual tool some large fuel consuming companies, such as

airlines, use to reduce their exposure to volatile and potentially rising fuel costs. A fuel

hedge contract allows a large fuel consuming company commits to establish a fixed or

capped cost via a commodity swap or option. Large fuel consuming companies enter into

hedging contracts to mitigate their exposure to future fuel prices that may be higher than

current prices and/or to establish a known fuel cost for budgeting purposes. If a large fuel

consuming company buys a fuel swap and the price of fuel declines, the company will

effectively be forced to pay an above-market rate for fuel. If a large fuel consuming

company buys a fuel call option and the price of fuel increases, the company will receive

a return on the option that offsets their actual cost of fuel. If a large fuel consuming

company buys a fuel call option, which requires an upfront premium cost, much like

insurance, and the price of fuel decreases, the company will not receive a return on the

option but they will benefit from buying fuel at the then lower cost.

An oil refinery will need to procure 100,000 barrels of crude oil in 3 months' time. The

prevailing spot price for crude oil is USD 44.20/barrel while the price of crude oil futures

for delivery in 3 months' time is USD 44.00/barrel. To hedge against a rise in crude oil

price, the oil refinery decided to lock in a future purchase price of USD 44.00/barrel by

taking a long position in an appropriate number of NYMEX Brent Crude Oil futures

contracts. With each NYMEX Brent Crude Oil futures contract covering 1000 barrels of

crude oil, the oil refinery will be required to go long 100 futures contracts to implement

the hedge.

The effect of putting in place the hedge should guarantee that the oil refinery will be able

to purchase the 100,000 barrels of crude oil at USD 44.00/barrel for a total amount of


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USD 4,400,000. Let's see how this is achieved by looking at scenarios in which the price

of crude oil makes a significant move either upwards or downwards by delivery date.

With the increase in crude oil price to USD 48.62/barrel, the oil refinery will now have to

pay USD 4,862,000 for the 100,000 barrels of crude oil. However, the increased purchase

price will be offset by the gains in the futures market.

By delivery date, the crude oil futures price will have converged with the crude oil spot

price and will be equal to USD 48.62/barrel. As the long futures position was entered at a

lower price of USD 44.00/barrel, it will have gained USD 48.62 - USD 44.00 = USD

4.6200 per barrel. With 100 contracts covering a total of 100,000 barrels of crude oil, the

total gain from the long futures position is USD 462,000.

In the end, the higher purchase price is offset by the gain in the crude oil futures market,

resulting in a net payment amount of USD 4,862,000 - USD 462,000 = USD 4,400,000.

This amount is equivalent to the amount payable when buying the 100,000 barrels of

crude oil at USD 44.00/barrel.

With the spot price having fallen to USD 39.78/barrel, the oil refinery will only need to

pay USD 3,978,000 for the crude oil. However, the loss in the futures market will offset

any savings made.

Again, by delivery date, the crude oil futures price will have converged with the crude oil

spot price and will be equal to USD 39.78/barrel. As the long futures position was

entered at USD 44.00/barrel, it will have lost USD 44.00 - USD 39.78 = USD 4.2200 per

barrel. With 100 contracts covering a total of 100,000 barrels, the total loss from the long

futures position is USD 422,000

Ultimately, the savings realised from the reduced purchase price for the commodity will

be offset by the loss in the crude oil futures market and the net amount payable will be

USD 3,978,000 + USD 422,000 = USD 4,400,000. Once again, this amount is equivalent

to buying 100,000 barrels of crude oil at USD 44.00/barrel.


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1.2 INDUSTRY PROFILE

At present, there are seventeen refineries operating in the country, fifteen in public

sector unit, and one in private sector. Out of the public sector refineries seven refineries

are owned by Indian Oil Corporation, two by Hindustan Petroleum Corporation Limited,

two by Chennai Petroleum Corporation Limited and one each by Bharat Petroleum

Corporation Limited, Kochi Refineries Limited, Bongaigaon Refineries and

Petrochemical Limited and Numaligarh Refineries Limited. The one Refinery in joint

sector Mangalore Refineries and Petrochemicals Limited and one by private sector

Reliance Petroleum Limited.

The installed capacity of the Indian refineries is about 117 million tonnes per

annum from which the product availability may be about 108 million tonnes. Taking into

account the product availability from the fractionators of about 4.5 million tonnes, the

total products availability would be about 113 million tonnes at 100% capacity

utilization. While this is on overall basis, product like LPG is in deficit and other

products are in surplus, which would necessitate operating refining capacity to match

demand or export products depending on refinery economics and logistics.

During the year, as a part of reconstructing of downstream oil sector, KRL and

NRL have become the subsidiaries of BPCL. Government of India has sold its entire

shareholding in BRPL and CPCL to IOCL. Thus, BRPL and CPCL have become

subsidiaries of IOCL.

By this arrangement, the refineries have to face the challenge of deregulation, for

which the Government of India has already taken measures like phased dismantling of

Administered Pricing mechanism for refinery sector, particularly marketing deregulation

etc. As per the current program contemplated by the government, the marketing of

controlled products has been de regulated from 1.4.2002.

INDUSTRY STRUCTURE

As part of the deregulation of the oil sector as notified by the Government of India in

1997, the oil sector was deregulated in phases. The refining sector was deregulated in the


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first phase from 1.4.1998. The oil sector has since been totally deregulated from

1.4.2002. The year 2002-03 was the first year of operation of the oil sector in the

deregulated scenario and the prices to the customers were fixed by and large on import

parity (IPP) basis

In the liberalized business scenario, CPCL has completely switched over to Market

Driven Pricing Mechanism (MDPM) from APM, i.e. Administered Pricing Mechanism.

The table below gives the refining capacities of the oil refineries in India:

Name of the company Capacity

Million MTs(MMTPA)

Assam Oil company, Digboi, Assam 0.50

IOC, Gauhati, Assam 0.85

IOC, Barauni, Bihar 3.30

IOC, Haldia, West Bengal 2.75

IOC, Koyali, Gujarat 9.50

IOC, Mathura, UP 7.50

BPCL, Mumbai 6.00

HPCL, Vizag 4.50

HPCL, Mumbai 7.00

Kochi Refineries Ltd, kerala 7.50

CPCL, Chennai 9.50

CPCL, CBR 1.00

Karnal Refinery, Punjab 6.00

Mangalore Refineries & Petrochemicals Ltd 3.00

Reliance Petroleum Corporation Ltd 27.00


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1.3 COMPANY PROFILE

Chennai Petroleum Corporation Limited (CPCL), formerly known as Madras Refineries

Limited (MRL) was formed as a joint venture in 1965 between the Government of India

(GOI), AMOCO and National Iranian Oil Company (NIOC) having a share holding in the

ratio 74%: 13%: 13% respectively. Originally,CPCL Refinery was set up with an

installed capacity of2.5 Million Tonnes Per Annum (MMTPA) in a record time of 27

months at a cost of Rs. 43 crore without any time or cost overrun.

In 1985, AMOCO disinvested in favour of GOI and the shareholding percentage

of GOI and NIOC stood revised at 84.62% and 15.38% respectively. Later GOI

disinvested 16.92% of the paid up capital in favor of Unit Trust of India, Mutual Funds,

Insurance Companies and Banks on 19 th May 1992, thereby reducing its holding to 67.7

%. The public issue of CPCL shares at a premium of Rs. 70 (Rs. 90 to FIIs) in 1994 was

oversubscribed to an extent of38 times and added a large shareholder base.

As a part of the restructuring steps taken up by the Government of India,

IndianOil acquired equity from GOI in 2000-01. In July 2003, NIOC transferred their

entire shareholding to NaftiranIntertrade Company Limited, an affiliate, in line with the

Formation Agreement, as part of their organizational restructuring. Currently IOC holds

51.89% while NICO holds 15.40%.

CPCL has two refineries with a combined refining capacity of 10.5 Million

Tonnes Per Annum (MMTPA). The Manali Refinery has a capacity of 9.5 MMTPA and

is one of the most complex refineries in India with Fuel, Lube, Wax and Petrochemical

feedstocks production facilities. CPCL's second refinery is located at CauveryBasin at

Nagapattinam. This unit was set up in Nagapattinam with a capacity of0.5 MMTPA in

1993 and later enhanced to 1.0 MMTPA.

The main products of the company are LPG, Motor Spirit, Superior Kerosene,

Aviation Turbine Fuel, High Speed Diesel, Naphtha, Bitumen, Lube Base Stocks,

Paraffin Wax, Fuel Oil, Hexane and Petrochemical feed stocks. The Wax Plant at CPCL

has an installed capacity of 30,000 tonnes per annum, which is designed to produce

paraffin wax for manufacture of candle wax, waterproof formulations and match wax. A

Propylene Plant with a capacity of 17,000 tonnes per annum was commissioned in 1988


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to supply petrochemical feedstock to neighbouring downstream industries. The unit was

revamped to enhance the propylene production capacity to 30,000 tonnes per annum in

2004. CPCL also supplies LABFS to a downstream unit for manufacture of Liner Alkyl

Benzene.

The crude throughput for the year 2008-09 was 10.12 million metric tonnes

(MMT). The companys turnover for the year2008-09 was Rs 36489.67 crores and the

Profit after Tax was (Rs.397.28 crores).

Vision:

Chennai Petroleum Corporation will be a world class Energy company, well

respected and consistently profitable, with a dominant presence in South India.

Mission:

To maximize profit through the manufacturing and supply of petroleum products

and other related business in a reliable, ethical and socially responsible manner.

Company Objectives:

At CPCL, surpassing our own standards o f excellence has been a consistently

occurring phenomenon. A humble journey started with a refining capacity of 2.5

MMTPA has now grown to be the largest refining company of South India.

A steely resolve to stick to quality, an unrelenting passion to tread on a consistent

growth path, the finest of technology, care for environment, all put together, make CPCL

a resounding success story, year after year.

As part of the MoU signed with Indian Oil Corporation for the year 2008-09, CPCL

would strive:

y To maximize the profit and return on capital employed of the companyy To optimize utilization of the Refining capacity at Manali and at CauveryBasin,

including selection of appropriate Crude mix and production of Value Added

products.

y To maximize the yield of distillates in order to improve the Gross Margin.y To develop energy improvements schemes and reduce energy consumption and

losses in the refinery.


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y To synergies marketing infrastructure, capabilities and strategies with that of IOCin order to maximize profits.

y To move towards international standards of excellence in Refinery operationsy To strengthen information systems and information technology.y To continue efforts towards safety achievement and environmental protection.y To ensure execution of projects without time or cost overrun.y To focus training efforts on team building, creation of competitive mind-set and

refinery economics.

y To maintain reliability of operations at high level.Refineries:

Manali refinery:

The Manali Refinery has a capacity of 9.5 MMTPA and is one of the most

complex refineries in India with Fuel, Lube, Wax and Petrochemical feedstocks

production facilities.

The main products of the Refinery are LPG, Motor Spirit, Superior Kerosene,

Aviation Turbine Fuel, High Speed Diesel, Naphtha, Bitumen, Lube Base Stocks,

Paraffin Wax, Fuel Oil,Hexane and Petrochemical feed stocks. The Wax Plant at CPCL

has an installed capacity of 30,000 tonnes per annum, which is designed to produce

paraffin wax for manufacture of candle wax, waterproof formulations and match wax. A

Propylene Plant with a capacity of 17,000 tonnes per annum was commissioned in 1988

to supply petrochemical feedstock to neighboring downstream industries. CPCL also

supplies LABFS to a downstream unit for manufacture of Liner Alkyl Benzene.

Cauvery basin Refinery:

CPCLs second refinery is located at CauveryBasin at Nagapattinam. The initial unit was

set up in Nagapattinam with a capacity of0.5 MMTPA in 1993 and later on its capacity

was enhanced to 1.0 MMTPA.


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The main products of the Refinery are LPG, Naphtha, Superior Kerosene, High Speed

Diesel and LSHS

BUSINESSES:

Refineries:

CPCL is the largest refinery in South India with a total refining capacity of 10.5

MMTPA. CPCL has two refineries located in Tamil Nadu the first refinery at Chennai

with a capacity of 9.5 MMTPA and the second refinery at CauveryBasin near

Nagapattinam with a capacity of 1.0 MMTPA.

The Manali Refinery located at Chennai is one of the most complex andintegrated refineries with three crude distillation units, Diesel Hydro De-sulphurisation

unit, Fluid Catalytic Cracking unit, Furfural Extraction unit, Lube Hydrofinishing unit,

NMP Extraction unit, Hydro-Cracker unit, Propylene unit and Petrochemical Feedstock

unit.

The first refinery complex of CPCL was commissioned in 1969 with a capacity of

2.5 MMTPA and later expanded to 2.8 MMTPA. This refinery was designed to handle

heavy crudes and to produce Lube oil based stocks in addition to fuel products like LPG,

MS, HSD, SKO, ATF, Naphtha and FO. Thermal Cracker and Visbreaker units were also

installed to produce bitumen.

The refining capacity was doubled in 1984 to 5.6 MMTPA by setting up an

additional unit with a capacity of2.8 MMTPA. The secondary processing unit FCC -

was also installed to increase the production of high value products. A Wax unit was set

up to produce Paraffin and Match Wax. The capacity of the second unit was increased to

3.7 MMTPA through de-bottlenecking, taking the total refinery capacity to 6.5 MMTPA.

In 1994, the Lube capacity was increased from 140 to 270 TMTPA.


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CPCL set up a 0.5 MMTPA refinery at Cauvery Basin in 1993 for processing sweet

indigenous Narimanam crude. A gas treating unit to extract LPG from Natural Gas was

commissioned in 1996 and processes 2 lakhs scm per day of feed gas. The refining

capacity has been increased to 1.0 MMTPA in 2002 and processes PY-03 and BH crudes.

An oil jetty to transport crude from PY-03 and other sources has been commissioned in

2003.

A new Diesel Hydro Desulphurising unit with a capacity of 1.8 MTPA was

commissioned in 1999 at Manali Refinery, to produce HSD with 0.05% sulphur content

as stipulated by environmental considerations.

CPCL implemented a 3MMTPA-refinery expansion project in 2004 and increased the

refining capacity of Manali refinery to 9.5 MMTPA. The total refining capacity of CPCL

has thus increased 10.5 MMTPA.

A new Hydro-cracker unit was also set up as part of expansion project to increase

the production of high value products and to meet future specification of auto-fuel

products. With the commissioning of expansion project, CPCL has developed the

capacity to meet Bharat-II and Euro-III equivalent environmental standards.

Information Technology:CPCL has been successfully utilizing Information Technology to continuously

improve Business Processes in the company and to provide operational, financial, and

commercial information to executives at various levels.

CPCL implemented e-Applications ERP software, an indigenously developed

ERP package, from M/s. Ramco Information Systems. The ERP modules implemented at

CPCL include Sales and Distribution, Oil & Storage Movements, Maintenance,

Materials, Finance & Accounts, Projects and Human Resources. The implementation of

ERP has enabled CPCL to integrate the functions of major departments seamlessly and

ensure smooth workflow. To support ERP, CPCL has created the necessary IT

infrastructure and installed ERP servers, Storage Area Network (Network) and a Disaster

Recovery system for business continuity.


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CPCL has also integrated Access Control, Attendance and Inspection Management

Systems with ERP. CPCL recently developed modules for Fire & Safety and

Occupational health systems. With an objective to improve communication within the

organization, CPCL has developed an Employee Communication System (ECS). An

Intranet Message Board (IMB) has also been developed to encourage employees to share

technical information.

CPCL has taken a number of initiatives to provide on-line information to

employees through web, which resulted in saving of productive man-hours. The Intranet

is regularly updated with various knowledge sources, which are being accessed by

employees to improve their knowledge base. CPCL Intranet is also used for providing

information to employees on internal procedure and market events.

CPCL continuously upgrades hardware and network facilities to meet the IT

infrastructural requirements and to utilize latest technological advancements. CPCL is

currently upgrading the network backbone capacity to 1 Gbps. In order to improve

information security, CPCL is in the process of installing an Intrusion Detection System

(IDS).

The computer users in CPCL are provided with training on various aspects of

information technology every year. The areas of training include ERP, Lotus Notes,

Operating systems, Data Base Systems, Network fundamentals, Information Security and

new technologies.

Process optimization:

CPCL is the first among Indian refineries to implement Advance Process Control

(APC) and Optimization techniques in all its process units. APC is the proven technique

for reaping incremental economic benefits by implementing online strategies to control

higher-level objectives like quality control, energy minimization, unit/refinery wide

optimization and improved process unit stability. CPCL has implemented APC

technology (DMC Plus) from M/s Aspentech, USA, in all its major process units and has

further improved on it to achieve the best in process automation through its constant in-


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house endeavors, continuous technological upgrades and consistent uptime maintenance.

As a further step CPCL is now in an advanced stage of implementing Manufacturing

Execution System (MES). MES is a cyclic approach which integrates business

Optimization systems like Planning, Scheduling, yield accounting with real-time process

systems like Process information system, Advanced Process Control, Laboratory

information system and Performance monitoring.

CPCL has established a centralized, powerful, integrated, reliable web based real

time Process Information Network (PIN) interfacing 12 different Distributed Control

Systems (DCS) models. PIN also covers the off-site Tank farm information management

system and Laboratory information management system. PIN architecture is based on

Centralized Real-time database built on Aspen IP21 with in-house developed user-

friendly ASP based front end. PIN intranet website provides up-to-date information on

quality, quantity and unit performance through a single window.

Business Optimization

CPCL is first among the Indian refineries to implement and achieve the best from

Planning tools PIMS (Process Industry Modeling System) from Aspentech. To have a

consistent focus on the overall business objective CPCL has formed Refinery Business

Optimization (RBO) group to plan refinery operations and to orient the business planning

processes to the ever-changing dynamic market conditions.

The objective of the RBO group is to improve the refinery margins by planning

refinery operations using state-of-the-art Linear Programming (LP) techniques and

effective implementation of the plan. CPCL has also taken initiative to implement state-

of-the-art scheduling solution to further reduce the gap between the plan and actual.

Crude scheduling, Fuel refinery scheduling, Lube refinery scheduling and Multi period

product blending are various modules under implementation as part of the Scheduler

package.


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Environment Conservation:

CPCL ever since its inception has been methodically planning and implementing

several environmental conservation measures. A dedicated Environment Management

Team functions exclusively to plan, implement, operate and monitor all environment-

related activities.

CPCL Manali Refinery has obtained ISO 9001, ISO 14001 and OHSAS-18001

certifications.

CPCL uses the following multi pronged approach towards managing its Environmental

System

y Use of cleaner technology in Refinery process operationsy Continuous operation of pollution control facilitiesy Creation of environmental awareness amongst all employees

As part of awareness building efforts, CPCL celebrates world environment day every yea

Greener Environment:

The greening of CPCL and its environs is another facet of environmental

conservation. Planting and maintaining thousands of trees and shrubs form a green belt

around CPCL's plants. This mitigates fugitive emission, dilutes accidental releases and

balances eco-environment-besides beautifying the surroundings.

Environmental(R&D):

CPCL has conducted pilot plants studies with different technologies namely photo

- chemical oxidation, Ion exchange, Ultra-filtration, High Efficiency Reverse Osmosis

etc. for recycling of treated effluents in order to achieve Zero Discharge of effluents.

In collaboration with Central Salt & Marine Chemicals Research Institute(CSMCRI), CPCL has conducted pilot plant studies for indigenization of Reserve

Osmosis Membranes and has established a full scale plant of 1 Million Liter per day

capacity.


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Marketing:

CPCL produces a number of Petroleum and Specialty products that are used by

many industries like transport, fertilizers, power, railways, petrochemicals, etc. The

product basket of CPCL includes:A. Fuel Products:

Liqufied petroleum gas(LPG), Motor spirit(MS 0.25% sulphur-non-metro), Motor

spirit(MS 0.05% sulphur-metro), Motor spirit(MS Xtra premium grade

Superior kerosene oil(SKO), High speed diesel( HSDD 0.25% sulphur-non- metro),

High speed diesel(HSD 0.05% sulphur,metro), Aviation turbine fuel(ATF), Furnace

oil, LSHS, Light diesel oil(LDO).

B. Specialites

Naptha(non-fertiliser), Bitumen 80/100, Bitumen 60/70, Bitumen 30/40

Extracts-light, Extracts-heavy, Lube base oil SN 70, Lube base oil SN 150

Lube base oil SN 400, Lube base oil BS 150, Lube base oil SN 850, Lube base oil SN

500, Lube base oil -LVI(TOFS), CRMB-60, CRMB-55

Proposed Projects

Power Project

The company had signed an Expression of Intention with Neyveli Lignite

Corporation (NLC), a premier PSU in the power sector, for the joint development of492

MW power project. Discussions are on with NLC regarding formations of a joint venture

company, carrying on project development activities and fuel supply issues.

Crude unloading facilities for Manali Refinery

The company proposes to have new facilities for crude unloading for the Manali

refinery, since the life of the existing crude oil pipeline from Chennai port to the Manali

Refinery may be outlived by 2006. The transportation of crude oil in very large crude

carriers (VLCCs) has also been found to e cost effective as per the study do new by


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Indian oil tanking limited. The company will benefit by way of lower crude

transportation costs on completion of this is project.

Desalination Project

The company is proposing to install a desalination plant to supplement the current

raw water requirement at Manali complex and the future requirements of 3MMTPA

expansion project, near Chennai on built own and operates (BOO) Basis.

Joint Venture Project

Indian additives Limited (IAL)

The performance of Indian additives Ltd, the joint venture of the company with

Chevron Oronite Company (LLC) (Successor of Chevron Chemical Corporation) has

shown improvements over the previous year and it posted cash profit of Rs 4.89 Crore.

Indegeniousing and outsourcing has been taken up in the big way to improve the

competitiveness of the unit.

National Aromatics and Petrochemical Corporation Ltd (AROCHEM)

The government of India has approved the memorandum of settlement (MOS) to

e entered in to between the company and SPIC; SPIC had indicated that they are in the

process of finalizing the financial tie-up with banks and financial institutions.

Research and Development (R & D)

The company recognizes the need for continuous up gradation of technologies

and absorption of cutting edge technology to attain leadership position under the

liberalized policies of the government. Accordingly, all the facts of the operations if the

company receives the focused attention of the management to keep pace with

technological developments in the rest of the world.


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The company has taken all the required steps to further accelerate and intensify its

R&D activities to augment its growth opportunities.

The companys R&D center has been continuously providing technical support

service to the refinery in evaluation of crudes, catalyst and feedstock. R&D pilot plants

and analytical facilities provide valuable data for solving problems related to the Refinery

process units optimizing the operating parameters.

Import Substitution and Development of Small Scale Industries.

The company continued to give thrust to the development of small-scale

industries. The value of import substitution amounted to Rs. 0.69 crore during the year.

The company effected purchases to the tune of Rs.1.60 crore during the year from scale

industries.

Safety

The company recognizes safety management as an important tool for preventing

accidents involving people and property. The company is strongly committed to achieve

production without compromising on safety, which is clearly reflected in the safety

policy of the company aims at zero accident and freedom from occupational illness at the

work place. The safety practices adopted by the company received many accolades from

various quarter .the most important ant prestigious among them was the award of the

OHSAS 18001 certification for occupational health safety management systems.

The company embarked up on various measures to ensure the safety of its employees

and important among them are:

The best practices team formed for safety in refinery operations continued itsstudy developed best practices and safety procedures, which are in line with

world-class refineries.


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Foreign experts carried out the independent safety studies. Each with specificfocus, this year.

Recommendations for improvement of refinery safety system given by M\sSolomon associates inc. USA as a part of the Excellency in competitive

performance programme were implemented.

Safety study carried out M\s Allianz Singapore as part of reinsurance assessment.

The five-year safety audit. British safety council carried out U.K out to audit thesafety management system, occupational health & hygiene practices. The audit

score qualified us for a 3-star award. Efforts being taken to bridge the gaps with a

view to achieve 5-star award in future.

M\s CLRI, Chennai, carried out a review of Hazop and risk assessment of theentire refinery complex. The study was completed. The risk potential assessed and

found to be within controllable limits.

Two off-site the statutory authorities to check the effectiveness of the off-site

emergency plan. Your company conducted mock drills in Manali Ennore area

participated in these mock drills.

The company sponsored a workshop on SAFETY IN REFINERIES jointly with

oil industry safety directorate at Chennai in which safety professionals from other oil

companies participated. Papers on safety were presented, and case studies wee taken up

for discussion. Various safety committees regularly meet and discuss safety related issues

to enhance safety in the refinery.


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Share Holding Pattern

The Companys Authorised Capital was Rs.400 crores and the paid-up share

capital was Rs.149.00 crores as on 31.3.2005.

The Shareholding pattern as on March 2006 was:

(%)

Indian Oil Corporation Ltd. 51.88

NaftiranIntertrade Company Ltd. 15.40

Financial Institutions/Mutual Funds/Banks/ Insurance Companies 15.16

Foreign Institutional Investors 9.70

Corporate Bodies/General Public/Non-Resident Indians etc 7.86

Total 100.00


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1.4 NEED FOR THE STUDY

Chennai Petroleum Corporation Limited (CPCL), formerly known as Madras Refineries

Limited (MRL) was formed as a joint venture in 1965 between the Government of India

(GOI), AMOCO and National Iranian Oil Company (NIOC) having a share holding in the

ratio 74%: 13%: 13% respectively. Originally,CPCL Refinery was set up with an

installed capacity of2.5 Million Tonnes Per Annum (MMTPA) in a record time of 27

months at a cost of Rs. 43 crore without any time or cost overrun.Hedging is the process

of managing the risk of price changes in physical material by offsetting that risk in the

futures market. Hedging can vary in complexity from a relatively simple activity, through

to highly complex strategies, including the use of options.

This study will help the organization to know about the futures and options and reduces

the risk of uncertainty in crude price. Hence, the project titled A STUDY ON RISK

MITIGATION TECHNIQUES USING DERIVATIVES INCHENNAI

PETROLEUM CORPORATION LTD


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1.5 OBJECTIVES OF THE STUDY

Primary Objective:

To study about the organizations crude oil trading mechanism. To enrich knowledge about derivatives segments and improve the profit

functions.

Secondary Objective:

Understanding and discovering more opportunities in hedging market. To analyze the companys crude oil buying price and market crude oil price. To understand about the companys inventory turnover.


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1.6 LIMITATIONS OF THE STUDY

The limitations for study are as follows:-

The study is limited for one year 2009-2010, operating sheet of accounts fromChennai Petroleum Corporation Limited.

The source of data, daily operating sheet not available.

The scope & duration of study is limited.


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1.7 SCOPE AND SIGNIFICANCE

It analyzes the price of crude oil from various parts of the world. The International prices of crude oil and petroleum products have been

extremely volatile.


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CHAPTER 2


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2.1REVIEW OF LITERATURE

According to James price risk is a risk resulting from the possibility that the value of a

security or physical commodity may decline.

According to Kaminski hedging can be used by any market participants who intend to

buy or sell a commoditysometime in the future, & who wish to know with

greatercertainty what price they will pay or receive.

Hull defines derivative instrument as an instrument whose price depends on, or is derived

from, the price of another asset

.

Clubley gives the overview of the development of the oil industry & explains how the

derivatives, in particular options & futures, industry conducts its business.

Pegado provides detailed explanations on world energy products trading agreements &

procedures, including.

A derivative is defined by the BIS (1995) as a contract whose value depends on the price

of underlying assets, but which does not require any investment of principal in those

assets. As a contract between two counterparts to exchange payments based on

underlying prices or yields, any transfer of ownership of the underlying asset and cash

flows becomes unnecessary. This definition is strictly related to the ability of derivatives

of replicating financial instruments

Derivatives can be divided into 5 types of contracts: Swap, Forward, Future, Option and

Repo, the last being the forward contract used by the ECB to manage liquidity in the

European inter-bank market. For a further definition of contracts, which should although

be known by the reader, see Hull (2002).


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These 5 types of contracts can be combined with each other in order to create a synthetic

asset/liability, which suits any kind of need; this extreme flexibility and freedom widely

explain the incredible growth of these instruments on world financial markets.

In section 2 I will look at some micro-economic results about derivatives; in section 3 the

issue of risk is addressed; in section 4 monetary policy results about derivatives are

shown, and in section 5 fiscal policy results are shortly presented. In a brief statistical

appendix some relevant data are presented.

Before derivatives markets were truly developed, the means for dealing with financial

risks were few and financial risks were largely outside managerial control. Few

exchange-traded derivatives did exist, but they allowed corporate users to hedge only

against certain financial risks, in limited ways and over short time horizons.

Companies were often forced to resort to operational alternatives like establishing plants

abroad, in order to minimise exchange-rate risks, or to the natural hedging by trying to

match currency structures of their assets and liabilities (Santomero, 1995). Allen and

Santomero (1998) wrote that, during the 1980s and 1990s, commercial and investment

banks introduced a broad selection of new products designed to help corporate managers

in handling financial risks.

At the same time, the derivatives exchanges, which successfully introduced interest rate

and currency derivatives in the 1970s, have become vigorous innovators, continually

adding new products, refining the existing ones, and finding new ways to increase their

liquidity. Since then, markets for derivative instruments such as forwards and futures,

swaps and options, and innovative combinations of these basic financial instruments,

have been developing and growing at a breathtaking pace.2

The range and quality of both exchange traded and OTC derivatives, together with the

depth of the market for such instruments, have expanded intensively. Consequently, the

corporate use of derivatives in hedging interest rate, currency, and commodity price risks


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is widespread and growing. It could be said that the derivatives revolution has begun. The

emergence of the modern and innovative derivative markets allows corporations to

insulate themselves from financial risks, or to modify them (Hu, 1995; 1996). Therefore,

under these new conditions, shareholders

It was long believed that corporate risk management was irrelevant to the value of the

firm and the arguments in favour of the irrelevance were based on the Capital Asset

Pricing Model (Sharpe, 1964; Lintner, 1965; Mossin, 1966) and the Modigliani-Miller

theorem (Modigliani and Miller, 1958). One of the most important implications of CAPM

is that diversified shareholders should care only about the systematic component of total

risk. On the surface this may imply that managers of firms who are acting in the best

interests of shareholders should be indifferent about the hedging of risks that are non-

systematic.Miller and Modiglianis proposition supports the CAPM findings. The

conditions underlying MM propositions also imply that decisions to hedge corporate

exposures to interest rate, exchange rate and commodity price risks are completely

irrelevant because stockholders already protect themselves against such risks by holding

well-diversified portfolios. However, it is apparent that managers are constantly engaged

in hedging activities that are directed towards reduction of non-systematic risk. As an

explanation for this clash between theory and practice, imperfections in the capital

market are used to argue for the relevance of corporate risk management function.

Studies that test the relevance of derivatives as risk management instruments generally

support the expected relationships between the risks and firms characteristics. Stulz

(1984), Smith and Stulz (1985) and Froot, Scharfstein and Stein (1993) constructed the

models of financial risk management. These models predicted that firms attempted to

reduce the risks arising from large costs of potential bankruptcy, or had funding needs for

future investment projects in the face of strongly asymmetric information. In many

instances, such risk reduction can be achieved by the use of derivative instruments.

Campbell and Kracaw (1987), Bessembinder (1991), Nance, Smith and Smithson (1993),

Dolde (1995), Mian (1996), as well as Getzy, Minton and Schrand (1997) and Haushalter

(2000) found empirical evidence that firms with highly leveraged capital structures are

more inclined to hedging by using derivatives. The probability of a firm to encounter


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financial distress is directly related to the size of the firms fixed claims relative to the

value of its assets. Hence, hedging will be more valuable the more indebted the firm,

because financial distress can lead to bankruptcy and restructuring or liquidation -

situations in which the firm faces direct costs of financial distress. By reducing the

variance of a firms cash flows or accounting profits, hedging decreases the likelihood,

and thus the expected costs, of financial distress (see: Mayers and Smith, 1982; Myers,

1984; Stulz, 1984; Smith and Stulz, 1985; Shapiro and Titman, 1998). The argument of

reducing the expected costs of financial distress implies that the benefits of risk

management should be greater the larger the fraction of fixed claims in the firms capital

structure.

The results of the empirical studies suggest that the use of derivatives and risk

management practices are broadly consistent with the predictions from the theoretical

literature, which is based upon value-maximisingbehaviour. By hedging financial risks

such as currency, interest rate and commodity risk, firms can decrease cash flow

volatility. By reducing the cash flow volatility, firms can decrease the expected financial

distress and agency costs, thereby enhancing the present value of expected future cash

flows. In addition, reducing cash flow volatility can improve the probability of having

400


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CHAPTER 3

3.1 RESEARCH METHODOLOGY


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Research in common parlance refers to a search for knowledge. Research can also

be defined as a scientific and system search for pertinent information on specific topic.

We can also say research as an art of scientific investigation.

ANALYTICAL RESEARCH:

The researcher has to use facts or information already available, and analyze these

to make a critical evaluation of the material. Other method used is the observational and

interactive method which is used to observe the working of the company

Step 1: Research Objectives

To Calculate the cash flow of the financial year2005-10 To find the variations in profit due to the changes in price of crude oil.

Step2: Develop the Research Plan

A: Data sources

Secondary data:-

The data has been collected from the corporate accounts of the company of the financial

year (2005-10), Annual reports, Magazines and Websites...

B: Research Approaches

Analytical Research: - It is best suited for Financial Analysis .Uses Fact or information

already available and analyzes to make a critical evaluation.

C: Research InstrumentSecondary data collection instrument:

Step 3: Collect the Information

The material that researcher collected secondary data from company.

Step 4: Analyze the Information


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Here we tabulate all data and use tables, charts, pie charts and some advance

statically techniques to analyze the raw data and convert those data into some meaningful

information

Step 5: Present the Findings

Researcher has presented analysis in verbal form, tabular form as well as graphical form.


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CHAPTER 4

TABLE NO. 4.1


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Profit earned through hedging for the periods from 2005-2010

Year 2005 2006 2007 2008 2009 2010

Inventories 241615.73 314909.62 321477.39 443203.37 247027.72 437824.0

Inventory

quantity6523. 5827. 5245. 5706. 3012. 6282.

Inventory at

market value

363,989.14 367,239.16 353,368.11 526,742.67 163,399.80 449,635.0

Profit earned

through

hedging122,373.41 52,329.54 31,890.72 83,539.30 83,627.92 11,811.0

TABLE NO. 4.2: Comparison of Profit before and after hedging

Year 2005 2006 2007 2008 2009 2010

Profit before

hedging

INR

93,591.69

INR

71,503.63

INR

88,088.32

INR

172,085.25

60,187.93 INR

68,376.41

Profit after

hedging

INR

215,965.10

INR

123,833.17

INR

119,979.04

INR

255,624.55

23,439.99 INR

80,187.42

CHART NO. 4.1: Comparison of Profit before and after hedging


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INTERPRETATION:

Company would have earned profit more than the usual profit if traded through

derivatives. In year2009 company have made profit of RS 6018700 through hedging.

TABLE 4.3

Earnings per share before and after hedging

-100000

-50000

0

50000

100000

150000

200000

250000

300000

profit before hedgi

profit after hedging


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Year 2005 2006 2007 2008 2009 2010

Earnings

per share40.08 32.29 37.96 75.41 -26.68 40.51

Earnings

per share

After

hedging

122.46 67.67 59.38 131.43 2.01 48.45

CHART NO 4.2: Earnings per share before and after hedging

INTERPRETATION: From the chart it is seen that earnings per share have always

higher in hedging and in year2009 the companies EPS were 26.68 and in hedging it

was + 2.01.

TABLE 4.4

-40

-20

0

20

40

60

80

100

120

140

Earnings per share (Rupees) eps after heding


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Comparing market price of crude oil and buying price.

Year 2005 2006 2007 2008 2009 2010

Market

crude rate$55.80 $63.02 $67.37 $92.31 $54.24 $71.57

Companies

crude buy

price

$37.04 $54.04 $61.29 $77.67 $82.00 $69.69

CHART NO. 4.3: Comparing market price of crude oil and buying price.

INTERPRETATION:

The companies crude buying price and market price is been having lots ofdifference.

TABLE 4.5

$32.82

$43.42

$55.80$63.02

$67.37

$92.31

$54.24

$71.57

$27.38

$37.04

$54.04

$61.29$77.67

$82.00

$69.69

MARKET CRUDE RATE companies crude buy price


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Analysis of Current Ratio

Year Current ratio Current liabilities CA/CL

2005-2006 360087.76 209064.53 1.72

2006-2007 443788.75 276646.43 1.60

2007-2008 615526.20 308824.41 1.99

2008-2009 366896.70 225268.38 1.63

2009-2010 565324.23 177061.34 3.19

CHART NO 4.4: Analysis of Current Ratio

INTERPRETATION

The ideal ratio between current assets and current liabilities is 2:1. This is insisted

because even if current assets are reduced to half i.e. 1 creditor will be able to get their

dues in full. The current ratio analysis is not stable throughout. In 2005-06 the current

ratio was 1.72 the ratio shows a fall and increase in the subsequent year. In the year2009-

10 there is a huge rise in the current ratio to 3.19.

TABLE 4.6

Analysis of Inventory turnover

1.721.6

1.99

1.63

3.19

2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

CURRENT RATIO


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Year Sales Average inventory Sales/AI

2005-2006 2112742.57 115836.16 18.24

2006-2007 2469481.77 155252.38 15.91

2007-2008 2801860.17 200171.10 14.00

2008-2009 3196390.63 164449.99 19.44

2009-2010 2497262.84 136127.74 18.34

Chart No. 4.5: Analysis of Inventory turnover

INTERPRETATION

This ratio indicates that the stock is moving with a constant range, which is

reasonable to use the company. The most utilization of sales Rs 3196390.63 lakh in the

year2008-09 periods is 19.44 in ratio.

TABLE 4.7

Analysis of Inventory Turnover Period

18.2415.91

14

19.4418.34

2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

INVENTORY TURNOVER

INVENTORY TURNOVER


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YEAR DAYS IN A YEARINVENTORY

TURNOVER RATIOYEAR/ITR

2005-2006 365 18.24 20.01

2006-2007 365 15.91 22.94

2007-2008 365 14.00 26.09

2008-2009 365 19.44 18.78

2009-2010 365 18.34 19.90

CHART NO. 4.6: Analysis of Inventory Turnover Period

INTERPRETATION

The inventory turnover period is increasing from the year2005 to 2008 up to 26.09 but in

the year2008-09 the inventory has been decreased by 7.31 due to decrease in price of

inventory.

TABLE 4.8

CASH FLOW STATEMENT FOR THE PERIODS OF 2005- 2010

YEAR 2005 2006 2007 2008 2009 201

Particulars

20.01

22.94

26.09

18.78 19.9

2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

INVENTORY TURNOVER PERIOD

INVENTORY TURNOVER PERIOD


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Cash Flow from Operating

Activities

Profit before tax 93363.08 72336.79 88088.32 172162.93 -59311 68376.4

Adjustments for

Depreciation 20938.04 23603.53 24193.78 25160.88 25082.19 26714.1

Deferred revenueexpenditure written off 53.31 95.17 202.11 0

Income from Long Term

Investment -66.88 -551.37 -146.67 -88.76 -147.93 -106.

Profit on Sale of Assets -155.54 (568.08 -28.31 -3.14 -17.55 -3.5

Profit on Sale of Investments 0 0

Liabilities / Prov. For Claims

written back -2403.21 -189.11 -409.94 -576.98 -146.96 -89.

Advances, Claims and

Material written off 81.49 152.48 310.84 237.31 104.51 101.2

Provision for Doubtful Claims

and Obsolescence of Stores 295.75 113.59 581.09 137.89 1548.02 106.1Loss on Sale of Assets 44.66 172.84 303.9 52.48 345.12 312.1

Interest on Borrowings 15665.72 17448.48 18829.87 19480.81 22366.18 13735.5

Interest income from short

term investment -46.42 -155.22 -706.31 -662.8 -131.2 -0.6

Operating profit before

working capital changes 127770 112459.1 131218.68 215900.62 -10308.62 109145.5

Changes in Working Capital

Trade and Other Receivables -35185.8 -21378.73 18207.94 -49756.41 52775.67 11135.0

Inventories -121671.7 -73553.55 -7094.74

-

121874.85 196174.67 -190916.

Trade and Other Payables 83227.62 36468.52 26866.83 11250.99 -37218.26 -68767.8

Change in Working Capital -73629.88 -58463.76 37980.03

-

160380.27 211732.08 -248549.3

Deferred revenue

expenditure incurred -209.32 0 0

Cash generated from

Operations 54140.12 53786.02 169198.71 55520.35 201423.45 -139403.8

Adjustments for

Direct taxes paid -14609.38 -23077.64 -25945.62 -43673.29 -18733.38 -10299.

Direct taxes received 0

Fringe benefit paid -235.76 -454.27 -218.45 -248.5 -31.6Net Cash flow from

Operating Activities 39530.74 30472.62 142798.82 11628.61 182441.57 -149734.68

Cash Flow from Investing

Activities

Purchase of Fixed Assets -18139.53 -9594.17 -23120.99 -33505.8 -49704.31 -89034.1

Sale of Assets 182.93 618.08 38.19 16.45 43.62 169.2


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Deferred Revenue Expenditure 0 0 0 0

Investments (Net) 0 -9273.55 0 142.81 8494.49 -61.4

Interest Received from short

term investment 46.42 155.22 706.31 662.22 170.41 1.1

Income from Long Term

Investment 66.88 551.37 146.67 88.76 147.93 106.

Net Cash used in Investing

Activities -17843.3

-

17543.05 -22229.82 -32595.56 -40847.86 -88818.6

Net Cash Flow from Financing

Activities

Proceeds from Calls in arrears

/Issue of Shares including

premium 0

Proceeds from Long Term

Borrowings -34155.9 -17521.3 -16058.75 -21867.9 -13833.75 -37946.2Repayment of Borrowings 37175.54 52564.61 -75420.26 83500.38 -76421.37 290944.6

Interest Paid -16574.06

-

17518.74 -18691.38 -19472.69 -22306.33 -13950.9

Dividend Paid -7432.68

-

22228.49 -13439.5 -17831.58 -25233.8 -22.6

Corporate Dividend Tax Paid -973.12 -3132.96 -1879.77 -3036.9 -4302.27

Net Cash Generated from

Financing Activities -21960.22 -7836.88 -125489.66 21291.31 -142097.52 239024.8

Net change in Cash & Cash

Equivalents -272.78 5092.69 -4920.66 -324.36 -503.81 471.4

Cash and Cash equivalents at the

end of Financial Year 970.11 6062.8 1142.14 1466.5 962.69 1434.1

Cash and Cash equivalents at the

beginning of Financial Year 1242.89 970.11 6062.8 1142.14 1466.5 962.6

Net Change in Cash and Cash

equivalents -272.78 5092.69 -4920.66 324.36 -503.81 471.4


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CHAPTER 5

5.1 FINDINGS


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y The difference between the company buy price and market price are $16.04 $18.76$8.98 $6.08 $14.64 ($27.76) $1.88

y If the company would have done commodity trading the company would made profit ofRs 23439.99 in lakhs

y Earnings per share value would have been 27.81 instead of -26.68 in 2009 and 50.04instead of 40.51 in 2010

y The liquidity position of the company is moderate it showed an decreasing currentliability for the 2009-10 last year. This is because of increase in other current assets of

the firm.

y The inventory turnover period is increasing from the year 2005 to 2008 up to 26.09 butin the year 2008-09 the inventory has been decreased by 7.31 due to decrease in price

of inventory.

y This ratio indicates that the stock is moving with a constant range, which is reasonableto use the company. The most utilization of sales Rs 3196390.63 lakh in the year 2008-

09 periods is 19.44 in ratio.

y The ideal ratio between current assets and current liabilities is 2:1. This is insistedbecause even if current assets are reduced to half i.e. 1 creditor will be able to get their

dues in full. The current ratio analysis is not stable throughout. In 2005-06 the current

ratio was 1.72 the ratio shows a fall and increase in the subsequent year. In the year

2009-10 there is a huge rise in the current ratio to 3.19.

5.2 SUGGESTIONS


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y The organization should Practice commodity derivatives trading.y Outsource expert advice services for commodity derivatives trading.y Employee a committee within the organization for derivativesy The company must not only relay only on the futures contract they must also take

additional care to reduce the raw material cost.

y The company may try to reduce the inventory by using the inventory managementtechniques such as EOQ and ABC analysis.

5.3 CONCLUSIONS


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Over the last twenty years oil has become the biggest commodity market in the world. I

would like to stress out, that during this period; oil trading has evolvedfrom a primarily

physical activity into a sophisticated financial market. In the processit has attracted the

interest of a wide range of participants who now include banks andfund managers as well

as the traditional oil majors, independents and physical oiltraders.

The oil market now offers an almost bewildering array of trading instruments that canbe

used to reduce the price risks incurred by companies buying and selling physicaloil.

These instruments include forwards, futures, options and swaps. The instrumentscan be

traded through organized financial exchanges or on the over-the-counter (OTC)markets.

Futures contracts enable companies to buy and sell oil of an agreed standardizedquality,

quantity and delivery terms for future delivery within the institutionalframework of a

futures exchange. Forward contracts enable companies to buy and selloil privately

between them for future delivery outside the institutionalframework of a futures

exchange. Price swaps enable companies to exchange pricerisk without involving the

physical delivery of any oil. Like forward contracts, swapsare agreed directly between

two parties and are not guaranteed or otherwise organizedwithin any institutional

framework. Options enable companies to lock in a maximumor minimum price for the

purchase or sale of oil at a future date in exchange for afixed non-refundable insurance

premium.

The objective of this thesis was to study and analyze the various derivativeinstruments

available on the global financial market and to present practical examplesfor hedging

crude oil price risks in accordance with broad-based hedging strategies.An in-depth

theoretical explanation of derivative instruments and the strategiesapplied in energy

hedging was given. The value of the thesis comes from practicalexamples for hedging

price risks and from general recommendations in regards tohedging with derivative

instruments.I believe that the objective of the thesis was successfully achieved.

Toconclude, it must be said, that crude oil forms the basis of global energy markets andis

the most important trendsetter for energy products as a whole. It is important toclarify,

though, that the most common strategies used in regards to crude oil hedgingcan also be

applied to other energy products as the specifics of various derivativeinstruments are


50/50

often similar or even identical. This is the reason why companiesworldwide and in

Estonia can and are applying the same strategies to the hedging ofprice risks of gasoline,

diesel oil, heating oil, jet fuel etc.

Date post:	08-Apr-2018
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