Risk control with options hedging for an oil import enterprise

Xing Yu and Dongwei Shi

International Journal of Industrial and Systems Engineering, 2019, vol. 33, issue 4, 450-472

Abstract: The paper examines the performance of several options hedging models, namely with currency options, with crude oil options and with both currency and crude oil options, for a crude oil importing firm. We simulate the returns, calculate optimal hedge ratios and suggest a risk management strategy. The empirical results show that the models of GJR-t and EGARCH-t are respectively suitable to forecast the volatilities for WTI crude oil price and exchange rates (CNY/USD). Student-t Copula is the best fitting function to describe the dependence structure among the bivariate return series. Furthermore, by comparing the risks measured by conditional value at risk (CVaR), we suggest that the risk appetite investors can buy currency options for hedging and the risk aversion investors can buy crude oil options for hedging. It is not wise to buy both options of currency and crude oil in terms of budget.

Keywords: risk control; options hedging; optimisation model; simulation method; conditional at risk; GARCH models; Copula functions; GJR models; EGARCH models; maximum likelihood estimate method; marginal distributions; dependence structure. (search for similar items in EconPapers)
Date: 2019
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