Managing Crude Oil Using Derivatives

1604 Words Mar 6th, 2015 7 Pages
MANAGING CRUDE OIL USING DERIVATIVES

The present price markers for crude oil are WTI, Brent and Dubai/Oman. The crude oil derivatives contracts are traded on the New York Mercantile Exchange (NYMEX). The exchange acts as a regulatory body and as a financial trading forum for all the parties interested in buying the options. Members of the exchange carry out the trades themselves, or they act on behalf of the firms they represent through an open outcry auction held in the trading room or the floor. The procedure begins when a buyer calls an authorized commodity broker with an order to buy or sell futures or options contract. This order is sent to the firm’s agent who is on the trading floor. The prospects of more profits increases for the investors when fluctuations in prices increase. (Graves and Levine, 2010). Buyers whose purpose is to minimize risk are called Hedgers and persons who want to increase their risk are called speculators. (Chance and Brooks, 2010; Graves and Levine, 2010).

Crude Oil hedging is a contract-based tool that is used by companies who consume fuel on a large scale. Some airline companies use hedging to reduce their exposure to volatile and possibly increasing fuel prices. The effects of seasonal changes and natural disasters can also have significant effects on the demand and supply of crude oil. If a company expects a rise in price of oil in the future, the company can sign a oil hedging contract to purchase oil at the current price months in…

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