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Hedging Oil Consumption - Essay Example
Finance & Accounting
Pages 6 (1506 words)
HEDGING OIL CONSUMPTION Table of Contents Question 1) 3 Question 2) 5 Question 3) 7 References 9 Question 1) In today’s competitive world the market has become very volatile and it is becoming extremely difficult for the companies to predict demand successfully…
There are other inherent risks associated with business such as currency fluctuations, volatility of crude oil prices and so on. In order to reduce exposure to volatility in the market, many participants prefer hedging strategies using derivatives. A derivative is a financial instrument which derives its value from the underlying asset. One of the hedging strategies alternatives that are available to the market participants is by using futures derivative. The main purpose of futures markets is to minimise uncertainty in transactions and hence reduce risk. The basic objective of futures market is to hedge the associated risk by taking such a position so as to neutralize possibility of risk as far practicable. A futures contact is a standard contract between two market participants to buy or sell a specific asset of standard quality, quantity for a given price agreed upon on the date of contract (also known as strike price) with payment and delivery occurring at maturity date. The contracts are standard in the sense that quantity, quality, price, strike price, delivery date, initial margin, marking to market, etc. ...
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