Fuel Hedging using CL Call Options

Discussion in 'Energy Futures' started by OddTrader, Dec 19, 2011.

  1. Think I have done enough backtestig of CL market for Crude Oil futures. Here is another experiment as I would like to know the cost of hedging.

    Basically my conclusion is quite similar to what Lee Hong Liang mentioned in his article "Unraveling the Hedging Maze" that: Vanilla (options?) have in most cases proven to be the most successful tool for hedging. ... An alternative would be to purchase a call option. Call option is essentially buying price risk insurance.

    Now I would like to post the upcoming signals on weekly basis for hedging CL. The strategy is to buy Call options only, for always keeping a long Calls position.


  2. Why Oil Prices Are So Volatile

    Cait Murphy



    Over the past two years, the price you've paid for a gallon of gas has ranged from an average of $1.60 to $4.11. To use an economic term, that's nuts. While the Arab oil embargo, the Iranian revolution, and the Gulf War, not surprisingly, provoked big price jumps at the pump, not one of those events caused a two-year round trip as dramatic as the one we've just seen. And the geopolitical drama that caused the most recent spike, sending the price of a barrel of crude up to $145 on July 4, 2008? Well, there wasn't one. So why did gas prices leap 100 percent in 12 months only to plummet to $30 on December 23, and then more than double, to a recent peak of almost $75 on August 21? And how much will it cost you to fill up your tank in the coming years?

    Crude Oil Prices 2000-Present

    What’s Driving Prices

    There are four major factors that determine oil prices — supply, consumption, financial markets, and government policies. What has happened is that what have historically been the fundamental factors in pricing the barrel — supply and consumption — are no longer in the driver’s seat.
    So this year, for example, there has been abundant supply and slowing demand, but prices have doubled. Economics 101 says that shouldn’t happen. But it has.

    “In today’s world, oil-price dynamics are different than even 10 years ago,” says Kenneth Medlock, an energy economist at the Baker Institute at Rice University in Houston.

    Prices are not just curious; they are wild. From 1999 to 2004, the biggest difference between the high and low price in any given year was $16; from 2005 on, the average variance was $52 — but in 2008 it was $115. Oil, of course, is not the only commodity that has been frisky; copper has been even more so this year, and everything from onions to equities has seen massive price swings. At the same time, investment in commodity indexes, which are heavily weighted in oil, has risen sharply, from about $15 billion in 2003 to $200 billion last year.

    And, yes, there is a relationship between increased investment and increased volatility, so speculators are indeed making a big difference in the oil market, something that has riled up politicians here and in Europe, who are concerned that high oil prices could hurt their countries’ economic recoveries. In late July, the U.S. Commodity Futures Trading Commission held hearings on what, if anything, to do about that. The CFTC is considering new rules for the oil markets.

    But before you go out and demand your Congressman ship all those speculators to an oil rig in Siberia, remember that speculation is an essential part of any financial market; the purchase of any stock, for example, is really an act of speculation on the future prospects of the company. And a larger point is that, like any market, oil operates in a context.

    The Bigger Picture

    One reason prices have been rising so strongly this year, for example, is that futures traders are doing what they are supposed to do — anticipating. Just as stock prices anticipate future returns, so do commodity prices. Specifically, traders are betting that the global economy will recover later this year, and that the supplies will therefore tighten. There is good reason to believe this is correct; world oil production last year was barely above 2004 levels, and there is little chance it is going to shoot up. Rather the opposite: Daniel Yergin, author of The Prize: The Epic Quest for Oil, Money and Power, and head of IHS/CERA, an energy consultancy, told Newsweek in early July that “of the 15 million barrels of new net capacity that was supposed to come online between 2008 and 2014, over half of it is at risk of not happening.” Investment in new fields has not been robust; when the current overcapacity is sucked up, the gap between supply and consumption will narrow again, forcing prices up.

    On that thinking, $75 per barrel can look like a good bet. “Over the last six months, crude-oil futures have been a proxy on economic growth six months out,” concludes Tom Kloza, publisher of Oil Price Information Service, a newsletter that tracks the oil market. “You can read the sentiment swings out there.”

    OK, but what about the really speculative speculation, such as the hedge funds, money managers, and banks that have gone into commodities big-time? Looking back, it seems almost certain that traders chasing paper profits drove some of last year’s frenzy; $145 oil at a time of soft demand and ample supply was “nuts, absolutely,” says Medlock. “Speculators can influence price beyond the fundamentals. When a majority of players don’t have a physical stake, they trade on technical indicators — psychological numbers. Quite frankly, that is nonsense in a physical market.”

    So why oil? Why not something else? Again, think context. Oil is globally traded, dollar denominated, and there is a lot of it. What has happened is that it has become, in effect, a financial instrument, being used as a hedge against both a falling dollar and inflation. If the dollar weakens, a trader can make money just by keeping the rights to a barrel and selling it as the greenback sinks. Before 2002, there was a weak correlation between the value of the dollar and the price of oil, but since then, the correlation has been strong. “Oil is the antidollar, even more than gold,” says Sean Brodrick, a natural resources analyst at Weiss Research in Jupiter, Florida. “I literally see this relationship on the screens — out of the dollar into oil, back and forth.”

    Then there is the fear of inflation. Date this back to the dot-com stock-market crash of 2000-01 and subsequent aggressive easing of monetary policy by the Fed. Concerned by the inflationary potential, money managers began to hold bigger commodity positions. Now consider the big spending increases by the Bush administration, plus the hugely expansionary nature of the Obama administration’s bailout and fiscal policies, combined with historically low interest rates. For those who think all this will be inflationary, the demand for oil and other commodities is going to be strong.

    What to Do About It

    Given that speculation is one of the villains in volatility, the natural political temptation is to whiplash the oil traders. And naturally, the traders are against any new restrictions, arguing that they provide necessary liquidity to the markets, allowing end users like airlines to hedge. The thing is, the latter seem to be ungrateful for the favor. The Air Transport Association denounced the “destructive volatility in oil markets” at the CFTC hearings on July 28; Delta Airlines (DAL) estimated the 2007-08 oil bubble cost it $8.4 billion. Consequently, “position limits” that restrict the number of contracts traders can hold are likely, as are increases in margin requirements and new requirements to reveal who is trading what and when.

    But this will not be enough. Volatility is likely when there is a tight fit between supply and demand. So the U.S. could also try to create a little more breathing room by reducing its consumption of oil and boosting its own production. The one and only certain way to reduce consumption is to raise prices; from November 2007 to October 2008, during the course of the Big Price Run-up, Americans drove 100 billion fewer miles than the year before. You won’t hear this on Capitol Hill, home to the illusion that conservation and cheap gas can occur simultaneously, but a higher tax on gas could help to stabilize prices. So could opening up more territory for drilling. And so would some assurance that there is a plan to finance government spending without simply printing money.

    Where Will Prices Go From Here?

    Oil-price forecasting is not for the humble. The oil market has often made very smart people look pretty stupid. And it is common for several smart people to look at the exact same data and then arrive at opposite conclusions. Right now, for example, Philip Verleger, a Colorado-based oil-price analyst, is predicting that prices could dip to the $20 range this year; Goldman Sachs, meanwhile, puts the figure at $85, considerably more than its December guess of $45, but well below its May 2008 prediction of a spike to $200. T. Boone Pickens estimates a 2009 average price of $75 and Morgan Stanley, $60.

    But over the long term, there is something akin to consensus that the days of cheap oil that characterized most of the 20th century are gone. While new CFTC regulations might cool some of the hottest money — and that is anything but certain, if the oil markets in London, Dubai, and elsewhere do not follow suit — all the other factors argue for higher prices. China and India’s desire for oil will only grow, and when the economic recovery comes, consumption will also rise in the U.S. and Europe. And the drop-off in investment means that once the current overhang is sucked up, demand will rise faster than supply. In this case, Econ 101 does apply: Prices will go up.


  3. Fuel Hedging In Volatile Markets With Call Option Spreads
    Posted on Tue, Nov 22, 2011
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    "It can't be denied that the recent volatility in the oil and fuel markets is proving to be quite challenging for many companies with active hedging initiatives. Regardless of whether you're a producer, consumer, refiner or marketer, managing the day to day volatility can be quite difficult to say the least. In the last month alone, the average daily change in front month WTI crude oil futures has been $1.63/BBL. During the same time, the average daily change for Brent has been $1.37/BBL. On the fuel side, the average daily change for front month heating oil, RBOB gasoline and gasoil futures, over the past month, has been $0.03167/gallon, $0.0390/gallon and $8.50/MT, respectively.

    crude oil hedging daily change resized 600

    And these are only the average daily price moves. If we look at the bigger picture, the cumulative daily changes over the past month alone are staggering: $34.16/BBL on WTI, $28.82/BBL on Brent, $0.665/gallon on heating oil, $0.8196/gallon on heating oil and $178/MT on gasoil.

    Which begs the question, what is a conservative, "low" cost, fuel hedging strategy that provides adequate protection while mitigating the exposure to day to day volatility? Let's examine how one can hedge with a call option spread.

    In practice, if you're a fuel consumer (air, marine, rail, road, etc.) and are looking for a fuel hedging strategy to mitigate your exposure to rising fuel prices while also allowing you to benefit if fuel prices decline, a call spread might be something to consider. A call spread is simply the combination of buying one call option and selling another call option whose strike price is higher than that of the first option.

    As an example, let's say you're looking at hedging your January 2012 fuel consumption with a call option spread. Looking at the futures, you see that February heating oil futures (which is the prompt month futures contract during the actual month of January) are at $3.00/gallon and you want to be hedged if heating oil prices move above $3.15/gallon. In addition, you can only afford to spend $0.05/gallon on option premium. What do you do?

    One potential strategy is to purchase a January $3.15 average price heating oil call option for approximately $0.0850/gallon. However, you only want to spend $0.05/gallon so you need to determine what call option to sell in order to reduce your cost to $0.05/gallon. A $3.35 call option is trading near $0.0350/gallon so you decide to sell this option thus providing you with a $3.15/$3.35 call option spread at a cost of $0.05/gallon. In short, buy spending $0.05/gallon, you have hedged yourself against the cost of heating oil rising above $3.15/gallon to a maximum of $3.35/gallon or $0.20.

    The following chart shows the impact of this fuel hedging strategy when the NYMEX heating oil futures settle between $2.75 and $3.50 per gallon. The "Net Fuel Cost" includes the $0.05/gallon cost of the option while excluding excluding basis, transportation and taxes.

    fuel heding call option spread resized 600

    While this strategy only provides a "minimal coverage," for a company looking for a low cost, conservative fuel hedging strategy, call option spreads are a strategy worth considering during volatile market environments."
  4. Maximizing Value in Volatile Commodity Markets


    "Political unrest in the Middle East combined with the aftermath of Japan’s earthquake and tsunami have ushered in a new stage of volatile commodity prices. After remaining relatively stable last year, crude oil prices have spiked up by more than 20 percent in the last several months to settle above $105 per barrel, while many fossil fuel prices have risen by more than 7 percent since Japan’s earthquake on March 11. Wheat, corn and milk prices all initially jumped up by at least 10 percent as well.

    Anticipating greater commodity price volatility, commodity trading firms, major oil and gas players, as well as companies with significant exposure to fuels have all been rapidly expanding their trading capabilities everywhere from the United States to Europe to the Middle East. Indeed, at least a dozen new trading operations were registered or announced last year in Switzerland alone.

    Yet while many companies are increasing their trading capabilities, only a rare few are building out the risk and pricing resources needed for them to capture the optimal value from the higher risks they’re assuming in their expanded operations. As a result, they risk reducing the profitability of their structured products by up to 90 percent by potentially neglecting to take into account important factors such as market liquidity. To take advantage of volatile commodity markets, traders need to develop a single perspective on a wide range of different risks to evaluate the true aggregated impact on their organization. Doing so is critical to safeguard not only the profitability of traders’ day-to-day operations, but also their high performance over the long term.

    There are several reasons why many firms are rushing to expand their commodity trading arms and to establish entirely new commodity trading operations. Leading commodity trading firms are building out global networks of operations to gain direct access to commodities, including their storage, refining and blending. That way they can fully exploit physical product knowledge in their trading. Others are moving into alternative commodity markets to develop more diversified portfolios. Large Asian and Russian oil and gas producers like PetroChina, Sinopec and Gazprom are branching out into the US, Europe and the Middle East to gain better insights into global pricing strategies.

    At the same time, companies with significant exposure to energy like New York-based Bunge, the world’s second-largest sugar trader, are expanding their trading operations into physical oil in order to trade around their natural short position in fuel oil. By doing so, Bunge can improve the margins in its shipping operation.

    Many companies’ risk and pricing capabilities trail far behind their ambitious expansions. Recent experiences from the financial crisis have highlighted weaknesses in risk quantification and valuation frameworks both in financial services companies as well as in commodity trading firms. Still, the common shortcomings have remained the same over the last couple of years as recent events have generally not led to structural improvements.

    Worse, the recent ramping up of commodity trading operations is making the task of managing the risks embedded in them even more complex. Many companies are bringing together various trading operations with motley collections of risk management frameworks. Most need to be aligned for firms to capture the optimal value across their consolidated asset and customer portfolios.

    Why then do so many commodity traders seem to ignore the need to evaluate their risks on a more comprehensive basis? Some don’t realize the magnitude of their risk exposure. Others don’t know that they are potentially forgoing opportunities for higher trading margins by inefficiently using their risk capital.

    Adopting more comprehensive integrated risk and pricing approaches can resolve many of these issues. By developing deep insights into all of the fundamental value drivers in a trading portfolio, an integrated framework provides the radar for risk exposures across all trading activities. This enables risk managers to identify the tangible market and credit developments to which the firm’s financial performance and liquidity are particularly sensitive.

    Profitability can be improved in a consistent way if the risk quantification methodologies used can capture the characteristics of the underlying asset base accurately. For example, a trading operation can understand the risks that it is facing and negotiate an appropriate margin for keeping the risk on its books. Deals that reduce the overall portfolio risk can be priced more aggressively than deals that increase risk, thereby creating an incentive for traders to develop an aggregated portfolio view on risks across all desks.

    Indeed, price simulation engines that account for the key empirical properties of commodities paired with models capturing asset optionality are not only powerful tools in trading risk management, but also in strategic decision making as they help executives to understand the life cycle of a trading strategy.

    This article highlights seven of the more common and onerous types of oversights that exist in commodity traders’ risk and pricing frameworks. We then suggest broad strategies for correcting these shortcomings and preventing new ones from springing up.

    Seven Blind Spots

    There are seven areas of risk that commodity traders often do not take into adequate account that can lead to dangerous underestimations of their true risk exposure:

    1) Market liquidity – Many asset-backed traders hold positions that are more than 100 times their daily transacted volumes. As a result, the risk resulting from these long holding periods may be more than 10 times greater than what has been quantified with a standard VaR approach. One European energy trading company recently discovered this the hard way after it was hit with tens of millions of dollars of losses from a losing position even though its VaR was well within acceptable limits. The problem was that the firm had not accounted for the market liquidity associated with its losing position, which it suddenly could not close because other players were simultaneously trying to do the same thing. Oil and gas traders face a similar dilemma since they are often engaged in longer-term commitments that become costly to hedge in the absence of liquidity.

    2) Methodology – Relying on insufficient and inconsistent methodologies can result in significant miscalculations of the value and the risk of a contract. A lack of adequate modeling techniques can create a structural impediment to capturing higher trading margins by forcing a trader to forgo the benefits of advanced market analysis techniques. For example, the profitability of oil trading in 2010 was reduced significantly when compared to 2009 and 2008, in large part because only a few traders had considered the risk of the forward curve flattening. As a result, many found it difficult to recoup the premium paid on large amounts of contracted storage capacity.

  5. .....(crickets chirping)....the suspense is killing me! What are the other 5 blind spots? :confused:
  6. You're not hedging physicals or your demand. So what is the point? You intend to buy calls, always in the market on some absurd connection to a paper on commercial hedging?
  7. Prop trading under the guise of hedging: The forgotten lesson of Metallgesellschaft and the Volcker Rule


    In the world of finance, the name Metallgesellschaft (MG) is known primarily as one of the early “derivative disaster” cases. MG was a metal, mining and engineering company, and the 14th largest corporation in Germany. At the start of 1994, the company stood on the brink of bankruptcy because of more than $1 billion in losses racked up by a small trading office in New York with a big bet in oil futures. MG’s debacle sparked a vigorous debate—our contribution is here, and a collection of many contributions is available here.

    MG was short on a set of long term contracts for the delivery of refined oil products to small businesses for periods of up to 10 years. Many of the contracts were negotiated with a fixed price, while others had more complicated terms. On the other side, MG was long a set of crude oil futures or OTC swap contracts for delivery in one to six months. Taken together, this looked like a long dated short position in the physical hedged by a short dated stack of futures. The critique focused on two questions. First, was the short dated stack a successful value hedge, or had traders at MG failed to accurately “tail the hedge”? Second, did the attempt to hedge such a long horizon physical obligation using derivatives subject the firm to one-sided margin calls, producing a liquidity crisis that the firm could not withstand? From these two questions flow a host of related questions about alternative designs of a better hedge, about the accuracy with which the accounting reflected the underlying financial reality, and governance.

    From the narrow perspective of financial engineering, these are all useful questions to consider. However, these questions all start from the premise that the task is to hedge the company’s given exposure on the physical contracts. That is what the situation looked like at first glance, from outside. But courtesy of the acrimony between the team that crafted the failed futures trading strategy and the corporation that dismissed them, a number of internal documents with details on the strategy became public.

    Those documents reveal that this premise was incorrect. The traders at MG operated under a very different premise: the long futures position was the real source of profit. If it had been up to them, they would have concentrated on building it up. However, corporate risk management rules limited the quantity of long futures contracts to the volume of physical deliveries. The traders, therefore, had an incentive to market the physical delivery contracts. The more they expanded their long positions in the futures contracts, the more they could loosen the limits imposed by the internal risk limitations, and expand speculative trades. The long futures position only looked like a hedge. In fact, it was a speculation. Traders used hedging to engage in risk taking. This was a classic prop trade disguised as a hedge of a customer facing transaction. When the prop trade blew up, it nearly brought down the entire firm. This aspect of the case is often forgotten.

    Eighteen years later, this lesson from the MG case has renewed relevance in light of the $2 billion trading loss by trader Kweku Abdoli at the Delta One desk of the Swiss bank UBS. That spectacular loss gave a fresh reminder of the dangers posed by prop trading at banks, and of the need for prohibitions like the Volcker Rule. So long as taxpayers are the backstop for banks, the traders, the management and shareholders do not suffer the full penalty of the risks from trading. Opposition to the Volcker Rule by bankers is strong, and takes many forms. They argue that any customer facing business, like a Delta One desk, is protected from the prohibition by the mere fact that it is customer facing. This is nonsense. Thankfully, the current draft regulations for the Volcker Rule look to all of the fingerprints of prop trading, and do not provide any such simplistic exceptions. Both the MG case and the UBS case show that prop trading can operate under various guises. It’s prop trading that is the problem, regardless of how it is cloaked.
  8. There is a year 1999 book (my copy edition has total 326 pges) by Culp and Miller: "Corporate Hedging in Theory and Practice - Lessons from Metallgesellschaft" talking about Hedging and the singnificant case of Metallgesellschaft.


    This work provides a comprehensive reference on the MG debacle and the corporate hedging debate. It also provides alternative perspectives on corporate hedging design and risk management from leading theoreticians.

    Only a total of 240 pages was mentioned in the above year 2010 edition.
  9. "
    - continued -

    Seven Blind Spots


    3) Diversification effects – If properly diversified, the market risk of a large commodity trading portfolio can be reduced by as much as 70 percent. However, many trading organizations lack the structural prerequisite for realizing such diversification benefits because they are unable to harmonize their risk quantification methodology across each of their trading books and risk types. As a result, they are missing out on potential savings: By increasing the scope of risks quantified and examining cross-commodity as well as inter-temporal correlations within a trading portfolio, Oliver Wyman recently identified $700 million in potential savings in risk capital for a large commodity trading firm. Further benefits were achieved after measuring the extent of diversification of the portfolio’s market and credit risk.

    4) Physical characteristics of real assets – The risks in structured deals and associated hedging activities are often incorrectly represented because traders rarely take into account the flexibility and optionality of assets like power plants, natural reserves, storage or transportation infrastructure. It is common practice to hedge out the portions of risk that are not well-understood or to disregard them in less sophisticated commodity trading operations. This often reduces the profitability of deals by more than half.

    5) Credit risk – Few organizations quantify expected or unexpected credit losses when they measure credit exposure, and even fewer reflect this in profitability calculations on a deal level. Yet taking credit losses into account can fundamentally change the profitability of a trade, especially for asset-backed traders, who have the bulk of their credit exposure with non-financial services counterparties. For example, the fact that a rating migration from BBB to BB may quadruple the expected loss is often not considered adequately upon the inception of a deal.

    6) Liquidity and collateral management – At a time when the recently passed Dodd-Frank Act will likely increase the volatility in exchange-traded and over-the-counter commodities, many large commodity trading operations still have difficulty quantifying their true liquidity needs for a limited number of days ahead. This is in large part because they fail to examine all of their available sources of liquidity and commitments. In fact, many large operations have trouble assessing how much they are trading against open credit or third party guarantees. As a result, they have little understanding of the potential impact of collateral or margin calls on their liquidity.

    7) Replacement cost – A combination of counterparty defaults and market turmoil may force a trader to source expensively at a spot price in order to compensate for physically missing forward volumes. Nevertheless, few firms consider the replacement risk that can result from the potential inability of a counterparty to deliver contractually agreed physical volumes. The impact may not only be limited to an opportunity cost but also could become a material loss.

    Six recommended steps to develop a more comprehensive risk framework

    Today, most commodity traders can count on missing out on potential margins because they are inaccurately measuring risks or inefficiently using their risk capital. Fortunately, they can take steps to develop a more integrated perspective of their portfolio and its potential impact on their organization.

    1) Treat risk management as a risk-adjusted value creator. The main purpose of a business enterprise is to capture rewards equivalent to the risks taken. And yet, many commodity trading organizations take a compliance-oriented view of risk management. As a result, they miss out on the potential benefits of developing a more comprehensive risk framework. Trading and risk management teams need to raise top management’s awareness of the benefits of integrated risk and pricing frameworks. Maximum commercial leeway should be granted to traders under an effective governance framework that ensures that the targeted return is commensurate with a level of risk that is in line with the entire organization’s risk appetite.

    2) Establish adequate risk quantification methodologies. Commodity trading organizations need to develop processes to ensure that key risks such as the seven mentioned above are all considered and that their risk capital is quantified efficiently, taking into account the benefits of diversification for an organization’s entire portfolio. These methods need to be tailored to a company’s asset portfolio and risk governance principles so that the company can stay in control of them and understand the risks that have been quantified.

    3) Enable consistent integration into a governance framework. A comprehensive governance framework is necessary to ensure that a broader set of risk information is used appropriately to steer a trading business. Risk-adjusted performance measures need to be linked to traders’ compensation in order to encourage them to use risk capital more efficiently and ultimately achieve greater profitability. Risk-adjusted financial planning for the holding company ensures that its strategic plan remains feasible and that any financial impact from trading operations in adverse conditions will be manageable. This way, the organization can be sure that it has sufficient cash liquidity to prevent being forced to pull out of positions prematurely.

    4) Institutionalize interactions between centralized risk management functions in an integrated framework. Critical information must be shared effectively. This implies that market and credit views will be synthesized and adequately reflected in liquidity risk metrics. A liquidity and collateral management team needs to ensure that sufficient liquidity is available to support profitable trading strategies.

    5) Develop stable reporting processes. Day-to-day trading operations must be supported with current risk information. Data must be captured and stored centrally to ensure all information is simultaneously available across the whole trading portfolio. Processes need to be largely automated to reduce operational risks and to free up reporting teams’ time to investigate where specific risk exposures such as market, credit and liquidity risk reside in the trading portfolio.

    6) Conduct ongoing model validation. An organization’s processes and competencies to manage model risk are vital elements in ensuring that risk capital efficiency does not come at the cost of additional model risk. This can be achieved by supplementing risk quantification tools with independent testing. Models optimized for capital efficiency should be regularly scrutinized through back testing and standardized validation routines.


    Commodity trading organizations that recognize an integrated risk and pricing framework contains tools for creating value will develop a significant competitive edge, particularly in highly volatile commodity markets. Custom tailored risk quantification methodologies that incorporate the elements described above are crucial for revenue growth, profitability gains and financial stability.

    Integrated risk and pricing practices will decrease operational risk dramatically. The combination of a centrally controlled methodology and an adequate governance framework reduces operational risk, particularly when a trading organization has experienced significant inorganic growth or undergone a period of consolidation.

    Management teams as well as shareholders will also have a better understanding of what capital buffer is required to realize strategic plans in a way that permits the trading organization’s cost of debt to be stabilized. Unlike using a standard VaR approach for determining the appropriate level of the capital buffer necessary, a more comprehensive Earnings at Risk framework increases the accuracy of risk quantification, especially for positions that cannot be easily liquidated. It also has the potential to improve risk capital efficiency significantly when paired with adequate market price scenarios.

    All of this will become increasingly important as commodity markets become more volatile in today’s fundamentally changed business environment.

  10. Read the topic very very carefully (with a positive and constructive mindset).

    It's about Fuel Hedging. It's about trading of CL futures options!

    This topic is one of the 42 (as at today) threads discussing about fuel (whether you're interested in it or not).

    #10     Jan 2, 2012