Recently, oil prices have been fluctuating constantly due to various factors as well as supply and demand of the world oil markets. So, Oil prices have become difficult to forecast. Crude oil traders have been exposed to the risk of price volatility and the crude oil derivatives market, where futures and options are traded as an alternative, has emerged. Especially crude oil buyers can hedge oil prices to minimize risk of oil price fluctuations in the world oil futures markets. Therefore, it is important to find out if hedging strategies are practically effective and an empirical analysis of the usefulness of hedging such as risk reduction or profit increase should be made.
This study is aim to analyze profitability of profit margin hedging strategy to buy crude oil. To find out whether profit margin hedging strategy has higher expected utility than other strategies such as always hedging and buying at expiration with spot price when buying crude oil, we simulated using Fishburn''s target utility function. In addition, we conducted variance ratio test using crude oil prices based on the theoretical background that profit margin hedging strategy is a profitable strategy when crude oil price follows mean reverting process.
The findings of this study are summarized as follows. First, When profit margin hedging strategy is used, the average crude oil price is lower than when using other strategies such as always hedging and buying at expiration with spot price. Also, the expected utility when using the profit margin hedging strategy is higher than the expected utility when using other strategies. Paired differences test results show that there is a statistically significant difference between the average price and expected utility of these strategies. Therefore, it is confirmed that the theoretical findings of the previous researches that profit margin hedging is the optimal strategy under a certain target utility function are empirically satisfied in the crude oil futures market.
Second, the variance ratio of crude oil futures price is larger than 1 or statistically insignificant. If the variance ratio is statistically significant and also greater than one, it means that the price does not follow mean reverting, but random walk or a certain trend.