Refer to the sensitivity analysis of Husky Energy Inc. reproduced in Table 7.2. The analysis discloses the potential effects of changes in prices of oil and natural gas, and of changes in the CON/U.S. dollar exchange rate, on 2016 cash flows and earnings.

Required

a. Evaluate the relevance and re liability of t his method of disclosing risk information.

b . The analysis indicates that the sensitivity of earnings to its oil and natural gas activities is before fair value gains and losses [Table 7 .2, Notes (1) and (3)]. Presumably, this is because price risks relating to these activities are effectively hedged. As an investor, would you find sensitivity information net of hedging, or before hedging, more useful? Explain.

c. Price risks arise from changes in the market prices of crude oil and natural gas, with associated foreign exchange risk because market prices are largely based on the U.S. dollar. Boards of directors of some companies limit hedging of future oil and gas price changes to only a portion of production or, at least, monitor the extent of hedging closely. That is, all production is not hedged. Why do boards impose such limitations on management's ability to manage risk? Give reasons based on corporate governance, cost, and investor diversification considerations.

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Table 7.2 Husky Energy Inc., Sensitivity Analysis, 2016 Effect on Earnings before Income Sensitivity Analysis 2016 Effect on Net Earnings(1) ($ millions) ($/share)(2) ($ millions) (S/share)(2) Average Increase taxes(1) WTI benchmark 43.32 U.S.$1.00/bbl 101 0.10 73 0.07 crude oil price3(4) U.S. $0.201 mmbtu NYMEX benchmark 2.46 14 0.01 11 0.01 natural gas price(5) WTVLloyd crude blend differential(6) 13.70 U.S.$1.00/bbl (56) (0.06) (42) (0.04) Canadian light oil margins 0.057 Cdn $0.005/litre 12 0.010 9. 0.01 Asphalt margins 20.80 Cdn$1.00/bbl 10 0.01 8 0.01 Chicago 3:2:1 crack spread 12.74 U.S.$1.00/bbl 80 0.08 51 0.05 Exchange rate (U.S. S per Cdn $)3X(7) 0.755 U.S. $0.01 (45) (0.04) (33) (0.03)