The Role of Oil Futures in Risk Management

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FInTHE ROLE OF OIL FUTURES IN RISK MANAGEMENT
From: To: Senior Management - Airlines Company

November 2011

0

University of Westminster - Westminster Business School International Risk Management

COURSEWORK

THE ROLE OF OIL FUTURES IN RISK MANAGEMENT

Student: Student ID: Course: Word count: MSc. Finance and Accounting 2557/2617

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EXECUTIVE SUMMARY In the world today, oil is being used as the main source of energy for a lot of core industries. Due to its non-renewable characteristics and the global rising demand, oil has increased in its value, which results in many oil price crises recently. For all those industries using large amount of oil in operation, the risk of rising oil price is an extensive problem. The most efficient method to hedge against this risk is by using oil futures contracts. Because of its effectiveness, oil futures contracts are playing a key role in risk management for a number of industries including transportation and manufacturing. This report provides principal knowledge about oil futures and its role in hedging the risk of oil price volatility. A case study of US airline industry with most updated data obtained from Bloomberg system is also discussed, which suggests the effectiveness of oil futures in risk management for most airlines companies. However, in some case, the inflexible use of oil futures may create a burden in financial costs while not producing effectiveness in risk hedging.

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TABLE OF CONTENTS

LIST OF FIGURES

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I. INTRODUCTION In the world of industrialisation, the role of oil is becoming more and more crucial especially for transportation and manufacturing industries. Those industries consume a large amount of oil, which constitutes the major part of their operational costs. However, having gone through the three oil crises in early and late 1907s and recently in mid 2000s, those…...

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