Hess 2008 Annual Report Download - page 54

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of its business, the Corporation is exposed to commodity risks related to changes in the
price of crude oil, natural gas, refined products and electricity, as well as to changes in interest rates and foreign
currency values. In the disclosures that follow, these operations are referred to as non-trading activities. The
Corporation also has trading operations, principally through a 50% voting interest in a consolidated partnership that
trades energy commodities. These activities are also exposed to commodity risks primarily related to the prices of
crude oil, natural gas and refined products. The following describes how these risks are controlled and managed.
Controls: The Corporation maintains a control environment under the direction of its chief risk officer and
through its corporate risk policy, which the Corporation’s senior management has approved. Controls include
volumetric, term and value-at-risk limits. In addition, the chief risk officer must approve the use of new instruments
or commodities. Risk limits are monitored daily and exceptions are reported to business units and to senior
management. The Corporation’s risk management department also performs independent verifications of sources of
fair values and validations of valuation models. These controls apply to all of the Corporation’s non-trading and
trading activities, including the consolidated trading partnership. The Corporation’s treasury department is
responsible for administering foreign exchange rate and interest rate hedging programs.
Instruments: The Corporation primarily uses forward commodity contracts, foreign exchange forward
contracts, futures, swaps, options and energy commodity based securities in its non-trading and trading activities.
These contracts are generally widely traded instruments with standardized terms. The following describes these
instruments and how the Corporation uses them:
•Forward Commodity Contracts: The Corporation enters into contracts for the forward purchase and sale of
commodities. At settlement date, the notional value of the contract is exchanged for physical delivery of the
commodity. Forward contracts that are designated as normal purchase and sale contracts under FAS 133 are
excluded from the quantitative market risk disclosures.
•Forward Foreign Exchange Contracts: The Corporation enters into forward contracts primarily for the
British pound, the Norwegian krone, and the Danish krone, which commit the Corporation to buy or sell a
fixed amount of these currencies at a predetermined exchange rate on a future date.
•Exchange Traded Contracts: The Corporation uses exchange traded contracts, including futures, on a
number of different underlying energy commodities. These contracts are settled daily with the relevant
exchange and may be subject to exchange position limits.
•Swaps: The Corporation uses financially settled swap contracts with third parties as part of its hedging and
trading activities. Cash flows from swap contracts are determined based on underlying commodity prices
and are typically settled over the life of the contract.
•Options: Options on various underlying energy commodities include exchange traded and third party
contracts and have various exercise periods. As a seller of options, the Corporation receives a premium at the
outset and bears the risk of unfavorable changes in the price of the commodity underlying the option. As a
purchaser of options, the Corporation pays a premium at the outset and has the right to participate in the
favorable price movements in the underlying commodities. These premiums are a component of the fair
value of the options.
•Energy Securities: Energy securities include energy related equity or debt securities issued by a company
or government or related derivatives on these securities.
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