A stochastic oil price model for optimal hedging and risk management

Teemu Pennanen; Luciane Sbaraini Bonatto

doi:10.1142/S0219024922500091

A stochastic oil price model for optimal hedging and risk management

Teemu Pennanen, Luciane Sbaraini Bonatto

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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).

Original language	English
Journal	International Journal of Theoretical and Applied Finance
DOIs	https://doi.org/10.1142/S0219024922500091
Publication status	Published - 15 Mar 2022

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10.1142/S0219024922500091

A stochastic oil price_PENNANEN_Accepted10Jan2022_GREEN AAMAccepted author manuscript, 913 KB
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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).",

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AB - 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).

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A stochastic oil price model for optimal hedging and risk management

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