Hedging Energy Risks with Derivative Instruments in Oil Trading

Tesis (Bachelor) , 2010 , 82 Páginas , Calificación: 2,2

Economía de las empresas - Banca, bolsa de valores, seguros, contabilidad

The financial crisis has proven how volatile markets can become within a very
shor t period of time. One commodity that went through peaks and troughs is
without doubt oil. A wide range of companies with business activities relying on the commodity and stable pricing, also went through highs and lows, whilst some went into liquidation. This circumstance let many companies think carefully about their risk exposure and how they effectively can manage it. This paper shows that:
The main exercise to mitigate risk is a well-structured risk management operation
which deliver the fundamentals for an effective usage of derivative instruments.
Prior to any securing activity with swaps or options, companies must pin-point
their current risk position, portfolios and their values. On this, the classical portfolio theory with the various modern extensions and portfolio analysis tools deliver a good concept for this question, however, oil has cer tain characteristics which companies need to take into consideration. Furthermore, the portfolio theory may not helping to mitigate risk that is driven by economic factors, hence, spreading risk in an essential part, but some risks can only be addressed other means. All variables may be used to derive, the hedging strategy, time horizon and trading instrument. Especially for the instruments, the paper shows a wide range of commonly used instruments and how they can be applied for distinct oil risk issues.

Inhaltsverzeichnis (Table of Contents)

• 1 Introduction
• 1.1 Problem definition
• 1.2 Objectives.
• 1.3 Scope of work
• 2 Trading Motivation and Theoretical Foundation
• 2.1 Risk management
• 2.1.1 Risk definition . .
• 2.1.2 Portfolio Management
• 2.1.3 Portfolio Analysis .
• 2.2 Trading Strategies
• 2.2.1 Hedge Trading
• 2.2.1.1 Direction: Buying- and Selling hedging
• 2.2.1.2 Motive: Asset-, Anticipative- and Strategic hedging.
• 2.2.1.3 Coverage: Normal-, Perfect-, Texas and Reversed hedging.
• 2.2.1.4 Application: Pure- and Cross hedging.
• 2.2.1.5 Scope: Micro-, Macro- and Portfolio hedging
• 2.2.1.6 Adaptation: Static- and Dynamic hedging
• 2.2.2 Arbitrage Trading.
• 2.2.3 Speculation .
• 3 Commodity Nature and Risk of Oil
• 3.1 Physical characteristics and refining
• 3.2 Market Participants. .
• 3.2.1 Physical seperation
• 3.2.2 Trading separation
• 3.3 Structure of the Oil Market .
• 3.4 Oil pricing arrangements.
• 4 Derivative Instruments to mitigate Commodity Risks
• 4.1 Nature of Derivative Instruments
• 4.2 Common Derivative Instruments in Commodity Trading.
• 4.2.1 Symmetric transactions
• 4.2.1.1 Forwards.
• 4.2.1.2 Futures
• 4.2.1.3 Swaps
• 4.2.2 Asymmetric transactions
• 4.2.2.1 Options
• 4.2.2.2 Swaptions
• 5 Risk Mitigation in Practice
• 5.1 Forwards & Futures
• 5.2 Swaps
• 5.3 Options
• 5.4 Swaptions

Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)

This paper aims to provide a comprehensive overview of hedging energy risks with derivative instruments in oil trading. It explores the theoretical foundations of risk management, portfolio analysis, and trading strategies, focusing specifically on the application of these concepts within the oil market.

• Risk Management in Oil Trading
• Portfolio Management and Analysis in the Context of Oil
• Common Trading Strategies for Hedging Oil Risks
• Derivative Instruments for Mitigating Commodity Risks
• Practical Applications of Derivatives in Oil Trading

Zusammenfassung der Kapitel (Chapter Summaries)

Chapter 1 introduces the problem of volatile oil prices and the need for effective risk management. It outlines the objectives and scope of the paper. Chapter 2 delves into the theoretical foundations of risk management, including risk definition, portfolio management, and portfolio analysis. It also explores various trading strategies, particularly focusing on hedging strategies. Chapter 3 examines the unique characteristics of oil as a commodity, including its physical properties, market participants, and pricing arrangements. Chapter 4 introduces derivative instruments, explaining their nature and common types used in commodity trading. It distinguishes between symmetric and asymmetric transactions, providing detailed descriptions of forwards, futures, swaps, options, and swaptions. Chapter 5 explores the practical application of these instruments for risk mitigation in oil trading, showcasing real-world examples and case studies. This chapter focuses on the use of forwards, futures, swaps, options, and swaptions in hedging oil price fluctuations.

Schlüsselwörter (Keywords)

This paper focuses on the key concepts of risk management, portfolio management, oil trading, hedging strategies, derivative instruments, and commodity risks. It explores the application of derivative instruments, such as forwards, futures, swaps, options, and swaptions, for mitigating price volatility and managing risk exposure in the oil market.

• Universidad: University of Applied Sciences Essen
• Calificación: 2,2
• Autor: Christian Sadrinna (Autor)
• Año de publicación: 2010
• Páginas: 82
• No. de catálogo: V151252
• ISBN (Ebook): 9783640635870
• ISBN (Libro): 9783640636228
• Idioma: Inglés
• Etiqueta: Hedging, oil, trading, contango, backwardation, portfolio, risk, risk management, Monte-Carlo, Arbitrage, Speculation, Refining, Refinery, crude, refined product, swaps, options, swaption, fixed, floating, forwards, forward, futures, IPE, ICE, NYMEX, CBOT, MtM, OTC, VaR, value at risk, WTI, Brent, Absicherung, Handel, Risiko, Rohöl, Öl, derivate, derivatives, Derivat, return, ROI, Standard Deviation, correlation coefficients, correlation, korrelation, Covariance, market, market risk, beta, beta-faktor, Mark-to-Market, OPEC, convenience yield, Random-Walk, exchange, margin, ISDA, Differential Swaps, Intrinsic value, Volatility smile, volatility, Volatilität