Abstract
Despite the growing share of renewable energy sources, most of the world energy supply is still based on hydrocarbons and the vast majority of world transport is fuelled by oil products. Thus, the profitability of many companies may depend on the effective management of oil price risk. In this article, we analysed the effectiveness of artificial neural networks in hedging against the risk of WTI crude oil prices increase. This was reformulated from a regressive problem to a classification problem. The effectiveness of our approach, using artificial neural networks to classify observations, was verified for over ten years of WTI futures quotes, starting from 2009. The data analysis presented in this paper confirmed that the buyer of a call option was more often likely to incur a loss as a result of its purchase than make a profit after the final payoff from the call option. The results of the conducted research confirm that neural networks can be an effective form of protection against the risk of price fluctuations. The effectiveness of a network’s operation depends on the choice of assessment indicators, but analyses show that the networks which, for the indicator that was selected, gave the best results for the training set, also resulted in positive rates of return for the test set. Significantly, we also showed interdependence between seemingly unrelated indicators: percentage of the best possible results achieved in the analysed period of time by the proposed method and percentage of all available call options that were purchased based on the results from the networks that were used.
Highlights
In today’s world, crude oil is one of the most important resources
In the first part of the analysis of the results, we present the impact of such parameters as the number of neurons, and the activation functions in the output and hidden layer on %MP, pEP and pNEP indicators
Analysis of indicators related to maximum profit (MP, pMP, pNMP), maximum loss (ML, pML, pMNL) and overall results (AR, pAR) that were achieved for the period of time being considered show that it is very difficult to generate profits by buying call options
Summary
In today’s world, crude oil is one of the most important resources. It is a leading fuel and its price has a direct effect on the global economy, oil exploration and exploitation, as well as many other activities. Crude oil plays a key role in numerous areas of the world economy as an input in the production of numerous types of goods in many sectors of the economy. Previous studies have shown that crude oil price fluctuations have a significant impact on the level of economic activity and consumer sentiment. This correlation was especially noticeable during the financial crisis in 2007–2008 [1]. There has been a lot of research on the relation between oil prices and the rate of real GDP growth, unemployment, and inflation rate in the USA [2,3,4,5,6,7,8] and other countries [9,10] as well as general studies on the impact of commodity price volatility on growth [11]
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