Risk Management of Oil Revenue Volatilities by Financial Derivatives

Abstract

Oil price volatility is considered as the main source of oil revenue volatility. Since Iran’s economy relies upon the oil revenues, stabilization and dealing with oil price volatility is necessary. Because of their efficiency and application in risk management, financial derivative tools are of interest of market players.  The hedging instruments investigated in the present paper are 1- to 4-month derivative contracts of NYMEX oil stock. Employing various econometric methods, the paper investigates risk hedging strategies, where to select the optimum position efficiency and utility of each position is measured. The results indicate that applying derivative contracts leads oil revenue risks to reduce at least 59% and at most 98%.