Abstract
Abstract The fluctuation of crude oil price is one of the greatest risks that oil-field operators are faced with. Crude oil is a strategie natural resource, and the range of the price fluctuation is quite wide. To avoid the disadvantage caused by the price fluctuation, operators can use oil-linked bonds, such as a crude oil future and a crude oil option on the market. Swap contract is the portfolio of crude oil futures, which is currently utilized in a static manner. Swap contract is preferred, if one wants to minimize the risk. However, this type of contract cannot respond to the boom of oil price and eventually loses the chance of bonus. In this paper, a dynamic hedging strategy is proposed, which can respond to the boom of oil price. The proposed portfolio changes its components in response to the changes of oil market. The performance of the strategy is assessed by using the real trading history on the New York Mercantile Exchange over the period of ten years.
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