Abstract
Financial hedging strategies are one of the preferred practices to protect oil and gas companies from prices’ volatility. The common approach consists in each business unit (e.g. crude exploration, natural gas, and refining) protecting itself against its own price risks. According to the “theory of syndicates” risk aggregation, and assuming that the risk tolerance assessment process is applied to every business unit, it is not clear whether separate hedging portfolio selections achieve a better risk protection than selection at company level. In this paper Copula-GARCH models are used to capture prices’ correlation and volatility, while business unit earnings are generated through Monte Carlo simulation. Optimal hedging portfolios are achieved with stochastic optimization over utility functions. We confront the business units’ portfolios through coherent risk measures against a portfolio for the whole company, which reveals to be the best option.
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Quintino, A., Lourenço, J.C., Catalão-Lopes, M. (2016). Evaluating Price Risk Mitigation Strategies for an Oil and Gas Company. In: Fonseca, R., Weber, GW., Telhada, J. (eds) Computational Management Science. Lecture Notes in Economics and Mathematical Systems, vol 682. Springer, Cham. https://doi.org/10.1007/978-3-319-20430-7_1
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DOI: https://doi.org/10.1007/978-3-319-20430-7_1
Publisher Name: Springer, Cham
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