Risk Management at ApacheApache's hedging strategy has brought several benefits to the company. First, like other companies that hedge major price risks, Apache has been able to reduce the amount of equity capital needed to support its operations and reduce its overall cost of capital since it is comfortable with an effect greater leverage. In addition, hedging facilitates the evaluation of company performance from a value creation perspective. Apache's hedging method of using "no-load collars" protected Apache from a potential price decline, while still leaving upside potential for the company. Chief Financial Officer Roger Plank said the hedging program produced production levels comparable to projected levels in 2001, exceeding the previous year's production by at least 25 percent and resulting in record financial results when combined low US production and robust prices. Plank described these advantages as ensuring Apache a "double-digit" return, and through hedging, Plank believed Apache would be able to purchase high-quality properties at low cash flow multiples. More subtly, Apache executives claimed that the hedge increased the company's credibility in the acquisition process by promoting the company's ability to close deals quickly and its reputation as a reliable deal-maker, thereby providing a huge advantage to Apache and its ability to run quickly. This is supported by Standard & Poor's upgrading of Apache's debt to A-, citing Apache's hedging practices and overall conservative financial practices. S&P explained that even if prices decline, Apache likely retains its ability to finance the fixed costs and capital expenditures needed to replace production. Apache's favorable hedging reputation provided relief to investors who were previously averse to hedging, thereby enhancing Apache's investment attractiveness and access to and terms of capital. Say no to plagiarism. Get a tailor-made essay on “Why Violent Video Games Should Not Be Banned”? Get the original essay Apache's hedging strategy also had potential dangers. Above all, Apache would forgo any additional profits if prices were to increase too much in its hedging strategy. This risk was realized in March 2001, when gas prices exceeded Apache's purchase price of $5.26. Additionally, the hedging strategy Apache uses can be very expensive to implement on a regular basis, especially when there is no guarantee that the hedging will prevent Apache from losing money both through losses and potential gains. Hedging could also create more volatility in reported earnings, particularly in the context of the advent of FAS 133 reporting requirements. Speculating on price movements and hedging them is risky because the price will eventually move unexpectedly at the end of the year. against the hedging strategy. Additionally, many investors dislike hedging and unfavorable hedging results could not only damage the company's reputation but also alienate current and potential investors...