RISK MANAGEMENT STRATEGY : CASE OF BHP LIMITED

BHP Billiton is a leading global resources corporation to the world, which

creates client long term sustainable value through acquisition, developing and
marketing of natural resources. The main business commodities of BHP contain
petroleum and potash, copper iron ore coal aluminium, manganese, nickel, and
group’s diamond business. The fundamental of BHP strategy is operational
capability through achieving advanced business results by expanding
company’s capabilities and simplicity which means that focussing efforts on
business activities. BHP operates under advanced business model, which
contains mainly four parts exploration and evaluation, extraction and
transportation, development, marketing and logistics. This model will allow
BHP to operate more efficiently with multi-commodity nature of its
organization. The strategy of BHP is to operate long term, low cost ,upstream
assets diversified by its geography, commodities and market through evaluating
and extracting resources ,distributing supply chain, managing financial risks
associated with revenue around the world ,BHP prefer to aim and deliver long
term value rather than focussing on short term returns, this may incur amount
that face the corporation. According tp the annual report 2014 BHP is mainly
exposed to four risks: external risk, business risk, operational risk, and
sustainable risk and used some appropriate derivatives to hedge them

BHP exposed to the price movement of crude oil , iron ore and
copper. Thus the price change of crude oil may have a significant effect on
company’s profit. BHP should hedge its exposure to these fluctuations on crude
oil in order to avoid this kind of loss in business operation. BHP could apply
two types of derivatives to hedge the commodity price risk: long commodities
future contracts and long commodities call options. BHP’s assets, cash flows
and revenues are influenced by amount of different currencies due to its global
business. This may result in significant impact on BHP’s financial results when
foreign exchange rates fluctuate. According to the BHP annual report; US dollar
is the major currency in which denominates BHP’s global business. However,
some other currencies may influence the business. There exist a situation that
sales will decrease at the end of trading with floating exchange rate and BHP
could still hedge the risk through shorting AUS dollar futures in order to avoid
the low cost. Also the company used natural hedge to reduce exchange rate risk
in business operation. Another risk involved the company is change of interest
rate which may have an impact on fair value of fixed rate instruments and cash
flows, currently BHP is exposed to interest rate risk on its business operation
such as investment and borrowing fields. Company is used to future agreement
to lock its future interest rate, because it could assist BHP to determine whether
to borrow or payback. Since the interest will be paid a certainty amount, BHP
could reduce the risk more efficiently.

Hedge strategy could benefit the company in its business operation.

Trading on future contracts and options can be used to reduce the loss of
company and the charge for trading futures is relatively low compared to others.
Options are less risky compared to other trading instruments.BHP is involved in
some uncertain risks when it operates global business around world. The
strategies were adopted in order to eliminate risks ,but it’s not possible to fully
eliminate the risk because of the external and uncertain factors and hedges have
certain disadvantages .but these are some of the recommendations that BHP can
apply when its exposure to business risks.