What hedge ratio did Petro Stopping Center use when entering into hedging derivatives?
Petro_Stopping_Center Franchise · 2025 FDDAnswer from 2025 FDD Document
uture gas sales from its bpx energy business.
The Company applied hedge accounting in relation to these highly probable future sales where there was an economic relationship between the hedged item and hedging instrument. The existence of an economic relationship was determined at inception and prospectively by comparing the critical terms of the hedging instrument and those of the hedged item. The Company entered into hedging derivatives that matched the notional amounts of the hedged items on a 1:1 hedge ratio basis. The hedge ratio was determined by comparing the notional amount of the derivative with the notional amount designated on the forecast transaction.
The hedge was highly effective due to the price index of the hedging instruments matching the price index of the hedged item.
Source: Item 14 — Other investments (FDD pages 131–208)
What This Means (2025 FDD)
According to the 2025 FDD, Petro Stopping Center, when managing commodity price risk related to highly probable future sales, enters into hedging derivatives that match the notional amounts of the hedged items on a 1:1 hedge ratio basis. This means that for every unit of the commodity being hedged, a corresponding derivative instrument is used to offset the price risk. The hedge ratio is determined by comparing the notional amount of the derivative with the notional amount designated on the forecast transaction.
For interest rate exposures, Petro Stopping Center designates as a fair value hedge the benchmark interest rate component only. The company issues fixed rate debt and enters into interest rate and cross-currency interest rate swaps with critical terms that match those of the debt and on a 1:1 hedge ratio basis. The hedge ratio is determined by comparing the notional amount of the derivative with the notional amount of the debt. The hedge relationship is designated for the full term and notional value of the debt. Both the hedging instrument and the hedged item are expected to be held to maturity.
This 1:1 hedge ratio aims to provide a direct offset to the price volatility of the hedged items, reducing the potential impact of price fluctuations on Petro Stopping Center's financial performance. This approach is common in risk management, as it seeks to neutralize the financial impact of price changes by creating an offsetting position using derivatives. However, the FDD also notes potential sources of ineffectiveness, such as the derivative counterparty's credit risk and sensitivity to interest rate differences, although these are not expected to be material due to risk mitigation strategies.