Abstract
Oil and gas companiesâ earnings are heavily affected by fuels price fluctuations. The use of hedging tactics independently by each of their business units (e.g. crude oil production, oil refining and natural gas) is widespread to diminish their exposure to prices volatility. How much should be hedged and which derivatives should be selected according to the company risk profile are the main questions this paper intends to answer. The present research formulates an oil and gas companyâs integrated earnings structure and evaluates the companyâs risk tolerance with four approaches: Howardâs, Delquieâs, CAPM and a risk assessment questionnaire. Stochastic optimization and Monte Carlo simulation with a Copula-GARCH modelling of crude oil, distillates and natural gas prices is used to find the derivatives portfolios according to company risk tolerance hypothesis. The hedging results are then evaluated with a multi-criteria model built in accordance with the expressed companyâs representatives preferences upon four criteria: payout exposure; downside gains; upside gains; and risk premium. The multi-criteria analysis revealed a decisive role in the final hedging decision.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
