Hedging energy price risk

Abstract

Hedging techniques are commonly used within companies, both financial and non-financial. These are applied as part of the risk management programmes of companies with the goal of minimising their exposure to unwanted risk. Since oil prices are extremely volatile, purchasers of this commodity find the use of hedging techniques as being quite advantageous for their business. The most commonly used hedging techniques are indeed derivatives such as forwards, futures, options and swap contracts. Such contracts provide them with price stability and certainty. In fact, this is what this dissertation will focus on. However, energy derivatives should not be treated in isolation but should be considered as part of a bigger picture. The underlying goal of this dissertation is to analyse the various derivative instruments available on the global financial market and to gather more information about the perceptions of Maltese risk managers on the subject matter. This will be achieved through research on the subject and also through the application of two different methodologies. The first methodology involves an empirical study where spot prices are compared with forward prices. Also, a regression analysis is carried out to test whether any relationship exists between gains or losses in one period and gains or losses in the subsequent period. The second methodology intends to examine the hedging strategies which are being implemented by three different Maltese companies and the reasons behind such decisions. Finally, this dissertation offers a number of recommendations which can be used by most organizations to manage energy price risk more effectively and efficiently.