Analysis of Nova 1 strategy formed by barrier options and its application in hedging against a price drop in oil market

This paper investigates hedging of a portfolio consisting of a risky underlying asset using the Inverse Vertical Ratio Put Spread (further IVRPS) strategy formed by single barrier options (category exotic options; subcategory path-dependent options) to study the difference between hedging using barrier and vanilla options. This strategy is useful for hedging against a price drop assuming the given underlying asset will be sold in the future. Barrier options were created to provide risk managers with cheaper means to hedge their exposures without paying for the price changes they believed unlikely to occur. They are options with second strike price, called barrier or trigger. Crossing of the barrier (in the form of frontier underlying asset price) during the life of an option implies activation or deactivation of particular barrier option. In general, they are more flexible and cheaper in comparison to plain vanilla options. In our analysis we use an interesting approach based on finding of the income functions from secured position in analytical form, which can simplify hedging process. These theoretical results are robust to different underlying assets and are useful for financial and also non-financial institutions. Many authors use this approach of analyzing for example Amaitiek, Balint and Resovsky (2010), Soltes M. (2010), Soltes V. (2001), Soltes V. and Amaitiek (2010a), Soltes V. and Amaitiek (2010b). A key difference between the previous studies is that in this paper we are concentrated on barrier options. Furthermore, we focus on the application to SPDR Gold Shares (GLD). SPDR Gold Shares offer investors an innovative, relatively cost efficient and secure way to access the gold market without being necessary to take care of delivery and safekeeping. GLD are an appropriate tool for those who want to play in the gold market, not for those who want to buy real gold. It is possible to use them for hedging, forming of option strategies etc. For these reasons they are very popular and SPDR Gold Trust is currently one of the largest holder of the gold in the world. We use vanilla and barrier option on these shares in our analysis. Due to the lack of real-traded barrier option data we calculate the barrier option premiums using an analytical model of Haug, who applied the Black-Scholes-Merton formula for all kinds of barrier options. We realize all calculations in the statistical program R because of simplification. The comparative comparison of proposed variants has shown the best results. We also find the best variants for the investor who speculates, and at the same time hedges against a slight or significant price drop. Our study confirms that this strategy formation using barrier options gives end-users greater flexibility to express a precise view. The results show that IVRPS strategy formation using barrier options is better than this option strategy formation using vanilla option in specific future price situations, but not in every practical situation. DOI: http://dx.doi.org/10.5755/j01.ee.24.1.3505

This paper analyses new innovative financial products in oil market. New modified outperformance certificates, i.e. barrier reverse outperformance and capped barrier reverse outperformance certificates, belong to the group of partial guaranteed investment products due to security buffer. Barrier reverse outperformance and capped barrier reverse outperformance certificates are designed with the aim to make a disproportionately higher profit in bear market. Detailed descriptions of the certificates´ profit functions in analytical form are provided. There is shown that the certificates´ payoff is created through the combination of traditional financial instrument and derivative products, especially American vanilla and barrier options. The principles of the financial engineering are explored to the investment certificates creation through the analytical expression of the American style of vanilla and barrier call/put options. Pricing formulas are developed for these certificates with specification of conditions under which the issuer is profitable in the primary market. Then several certificates for these types of innovative products associated with the United States Brent Oil ETF on 1st December 2014 are designed, analysed and compared with the best results for the investor at the future trade date. Our approach is based on real-traded American vanilla options data gained from Bloomberg. The barrier option premiums are calculated according to Haug option pricing in Bloomberg due to lack of real-traded barrier option. The main aim is to prove the nature of barrier reverse outperformance and capped barrier reverse outperformance certificates creations with the increasing of the intellectualization of all potential investors.DOI: http://dx.doi.org/10.5755/j01.ee.28.3.11481

Editor's column The oil market continues to wind itself through a period of oversupply and battles over global market share, with no short-term solution apparently in sight. Few analysts see an imminent sector-wide upstream recovery, and operators and the service sector seem to agree. The ramifications of the steep drop in prices since last year continue to make almost daily headlines. Crude oil production in the United States rose 9,000 B/D to 9.7 million bbl a day in April, the highest since May 1971, according to monthly data from the US Energy Information Administration (EIA). The slight increase in April from the previous month could indicate the US production is finally bottoming out, although in July, after 29 consecutive weeks of rig count declines, the US posted a slight gain in rig count, according to Baker Hughes’ weekly rig census. The latest version of BP’s annual Statistical Review of World Energy, released in June, said US oil production grew by 1.6 million B/D last year, becoming the first country to increase output by at least 1 million B/D for 3 years in a row. OPEC production continues to climb. Iraqi oil production rose to a record in June, and OPEC output reached its highest level since August 2012. Iraqi production rose by 567,000 B/D. Meanwhile, Saudi Arabia reported that it increased oil production to a record 10.56 million B/D in June, beating its previous record set in 1980. Overall, OPEC member output rose by 283,200 B/D to a 3-year high in June to 31.38 million B/D, according to a Bloomberg survey. US exploration and production (E&P) companies witnessed a nearly 20% decline in oilfield drilling costs from June 2014 to May 2015. The EIA said that lower rates from drilling service companies were caused by “downward pressure” on E&P capital expenditures. For the first time since 2011, global E&P capital expenditures will drop below USD 600 billion this year, a fall of 20.2%, according to an Evercore ISI survey. The survey predicted that that number could increase next year if oil becomes stable at USD 65 to USD 70 per bbl. Deepwater oil projects and gas facilities worth around USD 200 billion have been canceled or postponed this year because of the drop in prices, according to a new report issued by Ernst & Young last month. The consultancy expects the industry to make additional project cuts and delays as the industry anticipates a long period of lower oil prices. New data underscores why Saudi Arabia feared losing its global market share to other producers such as the US. Trade data show that Saudi Arabia last year was losing its market share to the US as well as to Iraq, Russia, and Iran in its sales to Asia in the second half of last year, according to Energy Intelligence. Saudi Arabia’s share of exports among the 20 largest crude sellers declined by 750,000 B/D in the second half of last year compared with the same period in 2013. Two-thirds of the drop came in a decline in Saudi sales to the US, while the rest came from losses in sales to China, India, Japan, South Korea, Taiwan, Thailand, and Singapore. Russia is now the third-largest crude oil supplier to China, with exports totaling 700,000 B/D in the second half of last year, an increase of 47% from year-earlier levels, according to Energy Intelligence. OPEC said its share of the global crude oil market last year declined to the lowest level since 2003. JPT

Dynamic volatility spillover between oil and marine shipping industry

This paper gives analytical formulas for lookback and barrier options on underlying assets that are exposed to a counterparty risk. The counterparty risk induces a drop in the asset price, but the asset can still be traded after this default time. A novel technique is developed to valuate the lookback and barrier options by first conditioning on the predefault and the postdefault time and then obtain the unconditional analytic formulas for their prices.

Airfares and oil prices: ‘Feathers and Rockets’ adjustments

Editor's column A new report from Ernst & Young seeks to find a bottom for commodity prices and any signs that might point to economic recovery. Among its findings are that the recent oil price fall was the steepest ever, at 75%, and that past price corrections have lasted an average of 73 weeks before recovering. Because recessions eventually have given way to economic resurgence that relies heavily on energy, the report concludes that now is the time for the oil and gas industry to prepare for economic recovery by continuing to drill, ensuring that it is retaining talent, and investing in alternative fuels. Others have sounded a similar note of late. At last month's annual Cambridge Energy Research Associates (CERA) conference, executives from BP, Shell, and other firms noted the importance of continued investment in energy. Robust long-term growth forecasts for hydrocarbons have not changed, and the industry could be caught flat-footed when the recovery comes if it shuts down too much now. Shell Chief Executive Jeroen van der Veer said he believes that global energy demand still will double over the next 40 years, boosted by consumption from the developing world. BP Chief Executive Officer Tony Hayward also showed optimism. "The world economy will recover," he said. "The future is not canceled." (For additional reporting on the event, go to JPT Online at www.spe.org/jpt.) The statements lend credence to the idea that many in the industry are trying to avoid some of the mistakes of the past, when R&D and staff were sharply cut in the wake of down cycles. But nothing paralyzes the oil market so much as price instability. After the steep drop in prices in the second half of last year, oil seemed to be recovering, only to fall again and remain volatile. Such unexpected swings deter decisions about investment, particularly those projects with sensitive price thresholds such as oil sands and unconventionals. Volatility also hampers merger and acquisition activity. Sellers are reluctant to shed assets at low prices while potential buyers continue to sit on cash. "Nobody has been willing to pull the trigger. Everybody has been waiting for the upside," said IHS executive Linda Kinney at a conference last month in Houston sponsored by the consulting firm. Daniel Yergin, Chairman of CERA, says the oil markets "are suffering acute whiplash" and that the price volatility since mid-last year is causing confusion and uncertainty. The International Energy Agency says a shortage of capacity was really at the center of the steep run-up in prices that ended last year. Although "speculation" may have played a role, it was really the fundamentals of supply and demand that drove the market. Strong growth from places such as China and India exploited years of industry underinvestment in both the upstream and downstream, constraining supplies. It expects a similar tightness could occur in just a few years after the global economy fully emerges from what appears to be a severe recession.

The year of 2020 started a new chapter in the development of former-Soviet countries. The coronavirus epidemic, which began in the Chinese city of Wuhan, has spread to affect all countries throughout the world, including the countries of the former Soviet Union. Its influence has already affected the economic and social development of the countries in the post-Soviet space. Closing borders, stopping tourism, and imposing severe restrictions on transport services were the first measures that contributed to reducing the incidence rates. At the same time, these measures affected bilateral and multilateral trade and economic relations among the countries of the post-Soviet space.All countries of the post-Soviet space have taken steps to allocate additional funds to combat coronavirus. Ad hoc funds were formed, the review of budget expenditures and revenues began. However, in fact in the first few months the countries faced economic distress, the overcoming of which could take considerable time.The coronavirus epidemic is taking place against the backdrop of global economic crisis and a sharp drop in oil prices. Economic development models based on increasing consumption without economic growth, increasing the level of external and internal debt have shown their insolvency. In these conditions, the countries of the post-Soviet space, which are highly dependent on the external factor, have also experienced significant economic hardships.Finally, the «price warfare» in the oil market has a strong influence. The United States and Saudi Arabia’s attempts to achieve dominance in the oil market, by displacing Russia from it, as well, have had a destabilizing impact on the world oil market. This factor has had a direct impact on those former-Soviet countries that produce and export hydrocarbon resources.In general, the coronavirus epidemic, taking place against the backdrop of global economic challenges and oil competition, will have a negative impact on the economic and political development of former-Soviet countries. The impact of the epidemic, its consequences, will affect the former-Soviet countries for many years to come.

In the present paper, we derive analytical formulas for barrier and lookback options with underlying assets exposed to multiple defaults risks which include exogenous counterparty default risk and endogenous default risk. The endogenous default risk leads the asset price drop to zero and the exogenous counterparty default risk induces a drop in the asset price, but the asset can still be traded after this default time. An original technique is developed to valuate the barrier and lookback options by first conditioning on the predefault and the afterdefault time and then obtaining the unconditional analytic formulas for their price. We also compare the pricing results of our model with the default-free option model and exogenous counterparty default risk option model.

The novel coronavirus (2019-nCoV) originated in China has now covered around 213 countries globally. It has posed health calamities which have threatened the world with the emergence. Owing to the number of confirmed cases still rising every day, it has now become a phase of an international health emergency. Sudden outbreak of coronavirus disease 2019 (COVID-19) has brought global declines in the commodity process. This has majorly affected the demand as well as supply of the commodities. The oil market has been severely affected due to the outrageous collapse in the demand majorly due to travel restrictions which has also caused the steepest decline in oil prices. The prices of both precious and industrial metals have also fallen, although the price drop is less than that of oil prices. The agriculture industry is one of the least affected so far by this pandemic due to its indirect relation with economic activities. However, the ultimate impact of COVID-19 pandemic will greatly depend on the severity and duration of its outspread, but it is expected to have long-lasting implications.

The price of oil more than halved in less than 5 months since September 2014, after nearly 5 years of stability. This chapter analyzes the reasons behind the recent drop in oil prices in both the demand and supply side of the oil market. Specifically, it sheds light on one of the most important reasons in the demand side, which is coming from the monetary policy that has been neglected in most interpretations. The authors of this chapter in their earlier research (Yoshino and Taghizadeh-Hesary, Int J Monet Econ Finance 7(3):157–174, 2014) found that this latter reason had significant impact in inflating the price of oil in 2009 following the subprime mortgage crisis when the world economy was in recession. By the easy monetary policy of the United States (US) and some other developed economies following the crisis, in early 2009 a large amount of liquidity entered into the oil market, since the developed economies were in recession, so they need a safe place in which to invest. In 2014 and 2015, following the recovery of the US economy and especially its capital market, liquidities that had moved from the disordered developed economies’ capital markets to oil and commodities markets during the global financial crisis of 2008–2009 in order to keep their real values, are coming back to capital markets, hence it reduced the global oil demand sharply which pushed the oil prices down.

Introduction During the early 1980s, the international oil market has changed from a sellers' to a buyers' market, that is, from one where the producers-exporters largely determined the price for that volume of exports which the market was willing (and eager) to buy, to one in which the importers-consumers have been able to press the price downwards and are willing only to buy a much smaller volume for the reduced price, than they had been buying by the end of the 1970s. But this identification of the current situation as one of crisis is only good enough as a first approximation. To be useful for the purposes of our analysis, it should be sharpened by several qualifications:' 1) Obviously, what is a crisis for the oil producers (a drop in demand, a drop in export price, a drop in production, and therefore a drop in export revenue) is a welcome development for importers (a smaller import bill, a smaller outward transfer of financial resources, a smaller degree of dependence on the foreign suppliers of a vital and strategic source of energy). 2) The impact of the crisis has hit all the members of OPEC (Organisation of Petroleum Exporting Countries) and OAPEC (Organisation of Arab Petroleum Exporting Countries) but the Arab members of OPEC have suffered a much greater shrinkage in their production and revenues, absolutely and relatively, than the non-Arab members. 3) Non-OPEC exporters (United Kingdom, Norway, Mexico, Canada, and the Soviet Union) have expanded their production over the three years 1980-2. 4) Although demand for, and production and consumption of, energy from all sources combined have dropped since the end of the 1 970s, the drop has been very small (about 1.6 per cent), while the demand for, and the production and consumption of, oil have dropped by about 12 per cent during the same period. In fact, the efforts to conserve energy and the effects of economic stagnation in the Western industrial countries (OECD), have been wholly reflected in the demand for and the supply of oil, with the demand for and supply of every other source of commercial energy actually rising between the end of 1979 and the end of 1981 and, in some instances, the end of 1982. 5) World reserves of coal are five times those of oil, the source of energy with

The relationship between oil prices and rig counts: The importance of lags

Investing in the financial market is an effective way to save and increase any free money an investor might have. The success of the investments is based on knowing the fundamentals of the financial and technical analysis of securities. The current uncertainty around the negative effect of the coronavirus COVID-19 on the world economy and its possible negative outcome contribute to their mass sell-out. The situation has been aggravated as well by the price war on the oil market, which has led to a significant drop in oil prices. A number of analysts believe that, despite the current market situation being near a panic, several of the falling stocks present a certain interest for investment, including stocks of metallurgical, energy, and telecommunications companies. In order to answer the question, which securities in which economic sectors free money can be invested in with minimum risk, it is necessary to identify the sectors of the economy which have the biggest investment potential. Many analysts point to the telecommunications sector as one of these economic sectors. Due to the continuous daily demand for telecommunications services, as well as their fairly stable growth, the stocks of telecommunications companies, the main ones of which are VimpelCom, MegaFon, MTS, Rostelecom and T2 RTK Holding, are highly attractive for investment. Furthermore, specialists from the company International Data Corporation (IDC) concluded that the outbreak of the coronavirus in China is able to have a positive impact on the development of the ICT-sector, opening up new opportunities for developing digital platforms and Big Data solutions. As a result of the threat of the coronavirus spreading, an extra push to develop the telecommunications sector of our country’s economy is given by the transition of school-age and university students to distance learning, starting in mid-March 2020, as well as the transition to working from home, when possible. A fundamental analysis of the main companies of the telecommunications economic sector in our country has shown that, starting from 2015, they can be tentatively divided into groups of high performance companies and companies with lower performance. The first group includes MTS and MegaFon, while the second includes VimpelCom and Rostelecom. In this regard, the stocks of the companies from the first group are more attractive in terms of investment when compared to the second. In order to determine which stocks are the most attractive for investments, a fundamental analysis of the shares of the first group should be conducted. The analysis conducted showed a great investment attractiveness for shares of MTS.KeywordsInvestmentTelecommunications sectorStocksInvestment attractivenessPandemicCoronavirus

Nonparametric panel data model for crude oil and stock market prices in net oil importing countries