The role of futures markets in hedging price risks - an applied study on crude oil futures

Abstract

The main purpose of this research is to hedge the risk of crude oil prices traded in future markets, which has become one of the most important areas of modern investment at both the local and global levels. All types of commodity and non-commodity assets from different countries of the world are dealt in these markets. The tool for dealing in these markets is futures contracts. The theoretical framework of the research included cognitive vocabulary that adequately reveals the nature of the subject, which included future markets, future contracts, future market functions, future pricing model, hedging and price risk reduction, and hedging strategies. While the research methodology included a comprehensive clarification of its problem and its hypothesis that following the low risk hedging ratio (BRM) leads to a better reduction of the loss of the hedging position and thus reducing the price risk to the lowest possible extent in the simple ratio,” hence the objectives. As long as this research is one of the applied research Which deals with commodity futures, and since crude oil is one of the most important futures commodities, Basra and Kirkuk oil were chosen as an applied field for research after linking them to Brent oil futures contracts. The research reached important cognitive conclusions, the most prominent of which was that reducing price risk to the lowest possible extent depends on the number of contracts It is necessary for hedging according to the simple hedging ratio and the risk-reducing hedging ratio, and therefore it is linked to the beta (risk) of the future contract and the behavior of present and future prices. It appeared that hedging Basra oil with Brent futures is more effective in reducing price risk to the lowest possible extent using the simple hedging ratio, while it has been shown that hedging. Kirkuk oil with a Brent future is more effective in reducing price risk to the minimum possible using a risk-reducing hedging ratio.