Managing Oil Price Risk with Derivatives Coursework

Managing Oil Price Risk with Derivatives - Coursework Example VIII. RECOMMENDATIONS 44 Bibliography 46 FIGURES Figure Page 1.0 World Oil Consumption by Region, 1970-2020 13 2.0 Increments in Oil Consumption by Region, 1970-2020 14 3.0 OPEC Oil Production 1973-2007 15 ABBREVIATIONS CFTC Commodities Futures Trading Commission GAO United States Government Accountability Office IEA International Energy Agency ICE International Exchange NYMEX New York Mercantile Exchange OPEC Organization of the Petroleum Exporting Countries OTC Over-the-Counter WTO World Trade Organization Section I: INTORDUCTION In the 21st century, oil prices are once again exhibiting an increased trend towards volatility since the last noticeable price hikes in the 70s and the 80s. There is no denying the fact that oil prices tend to be more volatile then any other commodity and thus could have a considerable impact on the economy of a nation. Therefore the developed and the developing countries are desperately...It is difficult to say whether this volatility will continue through 2009 or the things will revert back to the placid levels of 1986-2003 periods. The governments and financial institutions around the world are trying hard to come out with the instruments and the devices to control the risks imposed by the oil price volatility in the contemporary scenario. In that context, derivates could play a pivotal role in insulating the economies against oil price fluctuations. This paper intends to elaborate on how the oil price risks can be managed with derivatives. In the 21st century, oil prices are once again exhibiting an increased trend towards volatility since the last noticeable price hikes in the 70s and the 80s. There is no denying the fact that oil prices tend to be more volatile then any other commodity and thus could have a considerable impact on the economy of a nation. Therefore the developed and the developing countries are desperately resorting to all the strategies at their disposal, be it the price smoothing schemes, encouraging diversification, price control or fuel tax manipulations to tame the volatile oil prices (Bacon & Kojimi 2008).