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The Role of Futures and Other Energy-Linked Financial Instruments

Significant volatility has become a way of life in the oil markets. Traders find this level of market volatility attractive. Managers find the uncertainty inherent in this complex and volatile environment both unsettling and expensive. It creates significant economic risk, managerial risk, and capabilities risk. The dramatic explosion in the size and sophistication of oil-linked financial instruments represents a response to volatility. These markets have forced companies to adopt new strategies, business processes, information systems, and organizational structures to remain competitive. We expect the future will see many oil-linked financial markets and products which will provide new risk management tools. These trends will reward firms that can successfully manage risks associated with credit, liquidity, complexity, and financial evaluation.

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Energy Specializations: Petroleum – Markets and Prices for Crude Oil and Products; Energy Investment and Finance – Trading Strategies and Financial Instruments

JEL Codes: Q40: Energy: General, Q41: Energy: Demand and Supply; Prices, G13: Contingent Pricing; Futures Pricing; option pricing, Q02: Commodity Markets, L71: Mining, Extraction, and Refining: Hydrocarbon Fuels, G14: Information and Market Efficiency; Event Studies; Insider Trading

Keywords: Oil prices, volatility, risk management, oil futures, oil industry

DOI: 10.5547/ISSN0195-6574-EJ-Vol15-NoSI-15

Published in Volume 15, Special Issue of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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