Russian oil giant posts disappointing profits as Ruble slips further

Russian major gas giant OAO Gazprom on Wednesday posts a massively disappointing numbers of NP. The net profit plunged almost by 86% which is nearly $20 billion in 2014 due to the weakness of the ruble and one-off charges but analysts said underlying profitability looked strong. The profits could have been kept intact provided a smart currency hedging.

Largely shrugging off western sanctions on Russia over the crisis in Ukraine, Gazprom, which sells its gas in dollars and reports its profit in rubles was able to generate record cash flow of $17.2 billion. This is caused mainly by the ruble's about 50% fall against the dollar last year.

Derivatives radar:

The volume of trading in derivative instruments, such as options and futures contracts, on the Moscow Exchange more than doubled in the fourth quarter to 22.5 trillion rubles ($364 billion), while the number of newly opened currency option contracts soared o 38.3 million.

As we anticipate further slump in USD/RUB, it is advisable to hedge through buying call spread. The strategy can be established in this way, buy ATM (At the Money) call and simultaneously sell OTM (Out of the Money) call. Both should have same expiration (ideally far month contract).