Managing Oil Price Risk with Derivatives

High school
Pages 41 (10291 words)
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Since 2004, the oil prices have shown a predilection towards volatility and unpredictability. Starting with a decent $30/bbl in the first quarter of 2004, the oil prices skyrocketed to $132/bbl by July 2008. However, startlingly, in December 2008, the oil prices plummeted back to $50/bbl.


It is difficult to say whether this volatility will continue through 2009 or the things will revert back to the placid levels of 1986-2003 periods. The governments and financial institutions around the world are trying hard to come out with the instruments and the devices to control the risks imposed by the oil price volatility in the contemporary scenario. In that context, derivates could play a pivotal role in insulating the economies against oil price fluctuations. This paper intends to elaborate on how the oil price risks can be managed with derivatives.
In the 21st century, oil prices are once again exhibiting an increased trend towards volatility since the last noticeable price hikes in the 70s and the 80s. There is no denying the fact that oil prices tend to be more volatile then any other commodity and thus could have a considerable impact on the economy of a nation. Therefore the developed and the developing countries are desperately resorting to all the strategies at their disposal, be it the price smoothing schemes, encouraging diversification, price control or fuel tax manipulations to tame the volatile oil prices (Bacon & Kojimi 2008). ...
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