Managing Crude Oil Using Derivatives

In order to ensure a reduction in the impact of rising crude oil prices on our company, we will take several actions to ensure that the impact of crude oil prices will not be more affected. First, we will raise the selling price by a small amount to compensate for the loss of government contracts. By raising the price to make up for the losses caused by the financial. Of course, this method has a certain risk, because if the increase is too large, the buyer may not buy from us here, so this can only micro-adjustment, can not improve too much. Second, we will need to control costs, starting from most places to ensure that can make up for financial shortfalls. Third, we will communicate with customers, such as we will take a range range of price fluctuations, and customers that will not exceed the range will not fall out, so that customers have a psychological bottom line. Thus ensuring that traffic will not lose. Fourth, we will be a large sum of money and bank loans, this is a last resort. Not to the last minute try not to use, although the reality may not be ideal. We can increase production in this way, and when prices fall, we can hedge, so that when prices rise, can produce more revenue to

Since the acceptance of Dozier Industries’ bid, the company CFO has been exploring the methods available to best manage the exchange risk associated with the award payment being dispersed in British Pounds (GBP). He originally considered a forward contract or a spot contract, but is now investigating how currency options could help hedge against uncertain foreign exchange exposure. The CFO needs to decide whether or not options contracts might provide some benefit to hedge the currency risk.

In order to reduce risk, the company is using two hedging derivatives: forward contracts and put options to sell dollars. The aim of the paper is to determine an appropriate hedging policy which answers two main questions: how much to hedge, and in what proportions of forwards

In the meantime, investors and financial intermediaries can either buy or sell commodities using derivatives. They put capital that is crucial to encouraging the business of the producer and of the end-user. They stand prepared to execute with these market participants; without them, producers and end-users couldn't fence their

MGRM held futures amounting to 55m barrels whilst entering into Over-The-Counter (OTC) energy swaps amounting to 110m barrels. These privately negotiated swaps are agreements, allowing counterparties to swap commodities at a floating price for a fixed price. MGRM hedged long-term oil commitments against spot oil price increases on a one to one basis, by purchasing a “stack” of short-term futures equivalent to their remaining delivery requirements. Meaning that MGRM placed an entire hedge in short dated contracts as opposed to spreading it out over a longer duration, settling the expiring instruments then using the proceeds to purchase new instruments. Instead of purchasing and storing oil for future sales, MGRM adopted a synthetic storage strategy, allowing them to store oil supplies via futures without having to physically store any. Allowed MGRM to capitalize on their skills of extracting maximum profits from marketing oils without the gamble on direction of spot rates.

Semmler W. (2006) Professor of Economics and Research Fellow at the Bernard Schwartz Center for Economic Policy Analysis (SCEPA) of the New School in New York and Professor at the Center for Empirical Macroeconomics (CEM) at the University of Bielefeld stated, that at present, but the effect is another mechanism, with the functioning of modern financial markets has to do, the rise in oil prices: trade with oil derivates in the futures markets has increased in recent years gained importance. In these markets is already the demand of tomorrow traded. For example, traders anticipate what China is the future for oil to pay could be. The prices for derivatives in turn impact on the real prices.

The year 2014 witnessed a dramatic decrease in the world market price of crude oil. Beginning in June 2014, the price per barrel (pb) steadily declined from $115pb to below $50pb at the start of 2015 (Bowler, 2015; US EIA, 2015; Voigt, Walls, McKemey, Bakogiannis, Williams, Morley, Warga, & Bronstein, 2015). Fluctuations in oil prices can considerably affect various aspects of both the world and individual country economies (Basnet, Vatsa, & Sharma, 2014).

Hedging the transaction exposure with options also offers total protection against adverse currency moves, potential profit in the case of favorable event and the flexibility of the contract itself; meaning it offers a right, but not the obligation to buy or sell

As the growth in the shale, oil market is continuously increased the input of oil supplies in the market by 11 per cent, which make an oil price fall cause of overwhelming supply (Meyer,2013).As a result of this, the buyer has more choice to seek a supplier , which has a lower prices and better contract condition. Thus, these forces become a high threat to Afren.

Commodity futures trading in India remained in a state of hibernation for nearly four decades, mainly due to doubts about the benefits of derivatives. Finally a realization that derivatives do perform a role in risk management led the government to change its stance. The policy changes favouring commodity derivatives were also facilitated by the enhanced role assigned to free market forces under the new liberalization policy of the Government. Indeed, it was a timely decision too, since internationally the commodity cycle is on the upswing and the next decade is being touted as the decade of commodities.

Just as any market experiences it’s fair share of ups and downs, the oil industry is currently running down a slippery slope. From coast to coast across the United States, the price of gasoline has plummeted to levels were last seen during the recession of 2009 (Krauss). Although prices have somewhat improved at various points throughout 2015, average prices have remained low and are expected to stay that way for the next several years. Many people are simply overjoyed that their wallet seems a little less empty and it now takes only half the cost to fill up their gas tank, however, in the greater scheme of economics this is definitely not the best for the economy

Thus the oil market participants – producers, refiners, marketers, and traders – would not have one of their bases for setting prices in their contracts and other transactions. It does not appear that the oil industry was materially affected by the closing of the Nymex, which, in any event, resumed all operations in about one week. While the immediate effect of the attacks on petroleum markets was to drive prices up, market forces – reflecting little change in supply and demand – acted quickly, and crude oil prices eased within little more than a week. Average crude oil prices paid by U.S. refiners actually declined for the month of September 2001 – falling to $20.82 per barrel from $24.08 in the previous month.

The sporadic nature of oil prices has over the years posed as a great deal of concern to economists, investors, financiers, consumers, analysts and other relevant stakeholders. In a perfect market, the price of a commodity is an indication of the present circumstances as well as future signals that could impact demand and supply. Ordinarily, we expect prices of commodities to move in response to changes that affect demand and supply at a relatively ‘normal’ rate. When prices change drastically within a short period and consistently over time, then such market is fraught with high volatility – a typical case of the crude oil market.

This leads to a lower demand, and removal of the cost of shipping oil overseas. With this in mind, it is easy to see that with a local supplier the oil industry has created a surplus of crude oil, thus pushing prices down in order for these companies to compete with their competitors (economist). All of these factors took a role in the recent drop in oil prices, but the simplest explanation lies in the laws of supply and demand.

Crude oil is one of the most economically mature commodity markets in the world. Even though most crude oil is produced by a relatively small number of companies, and often in remote locations that are very far from the point of consumption but it is shipped all over the world. The global supply and demand determines prices for oil. Events around the world can affect the prices at our home for oil-based energy. OPEC, the large oil-producing cartel, does have the ability to influence world prices, but OPEC 's influence in the world oil market is shrinking rapidly as new supplies in non-OPEC countries such as U.S. are discovered and developed.