Hedging Effectiveness in Energy Market During Turbulent Economic Periods

Abstract

This paper investigates the usage of hedging and risk management in energy market. Energy firms adopt risk management tools in order to secure their positions. New economic environment leads them to take decisions based on secured positions. Financial crisis 2008 caused many problems in world markets and energy sector couldn’t be an exception. Due to the fact that energy sector is not mature yet, as there are too many companies which are involved in this market, key players expand their presence either by acquiring small companies or by entering in new areas. Evolution in energy market’s development and the difficulties in following the new challenges are crucial for firms’ economic stability. So, they have to protect their positions against risk exposure by using financial derivatives. Taking into consideration that crisis impact is pictured on firms’ value; we check whether energy firms have better output when they use hedging tools. In order to measure this impact in energy industry, we adopt Tobin’s Q. The investigation whether energy firms can decrease their risk exposure and increase their value by using financial derivatives is very interesting. The sample of this study consist energy firms on a worldwide basis. The implication of this paper is that energy firms may avoid huge economic problems when they adopt risk management methods.