Application of options in hedging of crude oil price risk

Abstract

This study shows how options can be used for hedging crude oil price risk in accordance with broad-based hedging strategies. Furthermore, it demonstrates how options are priced using the Black-Scholes model and the benefits of hedging via options. The potential losses and gains anticipated through hedging are illustrated using the scenario in the context of the current oil finds in commercial quantities in Ghana.

Predicting Futures Price And Contract Portfolios Using The ARIMA Model: A Case of Nigeria’s Bonny Light and Forcados

“…The convenience yield behaves non-linearly; And, price response to it behaves same. Thus, futures-price are informative insights about future-spot prices onlyexcept when spot prices substantially exceed futures-price (Dontwi et al, 2010;Oghenesode and Ojugo, 2018;Dees, 2015). Also, we note therein that unforeseen circumstances resulting from artificial scarcity, internal sabotage from some OPEC member states to circumvent limits band and to gain from back channelsa case in question is Kuwait (Ojugo, 2016;Oyemade and Ojugo, 2020;Ojugo and Oyemade, 2020;Ojugo and Eboka, 2018).…”

“…If prices rise over $z/barrel, the $y put option becomes worthless as $z call option is exercised and producer will sell at $z/barrel (no matter how high prices go). But, if prices are between $y/barrel and $z/barrel, neither option is exercised so that the producer sells at prevailing market price called collar (Dontwi et al, 2010). The strike price of the option can be set at any level, but the put and call options must be equally far out-of-the money if the cost of the put and call is to be the same.…”

Investigating The Unexpected Price Plummet And Volatility Rise In Energy Market: A Comparative Study of Machine Learning Approaches

“…This may be a result of: (a) change in condition due to model training via older dataset, and (b) energy is about dominanceand, politics plays a crucial role due to concerns, policies and interests. These, in time results in various shocks ranging from convenience yield, internal influences etc (Coppola, 2007;Dontwi et al, 2010). Oil price direction emphasizes the role of interest rates and convenience yield (adjusted spot-futures spread) to confirm that spot price normally exceed discounted futures-price.…”