A STOCHASTIC OIL PRICE MODEL FOR OPTIMAL HEDGING AND RISK MANAGEMENT

Teemu Pennanen () and Luciane Sbaraini Bonatto
Additional contact information
Teemu Pennanen: Department of Mathematics, King’s College London, London WC2R 2LS, UK
Luciane Sbaraini Bonatto: Department of Mathematics, King’s College London, London WC2R 2LS, UK

International Journal of Theoretical and Applied Finance (IJTAF), 2022, vol. 25, issue 02, 1-27

Abstract: In this paper, we develop a stochastic model for future monthly spot prices of the most important crude oils and refined products. The model is easy to calibrate to both historical data and views of a user even in the presence of negative prices which have been observed recently. This makes it particularly useful for risk management and design of optimal hedging strategies in incomplete market situations where perfect hedging may be impossible or prohibitively expensive to implement. We illustrate the model with optimization of hedging strategies for refinery margins in illiquid markets using a portfolio of 12 most liquid derivative contracts with 12 maturities traded on New York Mercantile Exchange (NYMEX) and Intercontinental Exchange (ICE).

Keywords: Oil prices; market risk; stochastic modeling; market incompleteness; optimal hedging; illiquid markets; risk management (search for similar items in EconPapers)
Date: 2022
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S0219024922500091
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijtafx:v:25:y:2022:i:02:n:s0219024922500091

Ordering information: This journal article can be ordered from

DOI: 10.1142/S0219024922500091

Access Statistics for this article

International Journal of Theoretical and Applied Finance (IJTAF) is currently edited by L P Hughston

More articles in International Journal of Theoretical and Applied Finance (IJTAF) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().