Question

Oil swaps , future , options are all examples of oil derivatives contracts . explain the difference and how these can be used in price risk management, and give examples . please this an update of the previous one send .

Answer 1

Swaps, futures and options are all types of the derivatives contracts and it is applicable in case of oil contracts also.

Oil future contracts are mostly standardised contracts and they are continuously traded on the stock exchanges and they will be providing with the obligation to exercise them before a particular date and they will be helping in hedging of various exporters in oil sector and oil futures are an important contract when it comes to hedging of the commodity exposure.

the example of oil futures will be going long or going short on the oil features in order to hedge the commodity exposure.

Oil option contracts are another form of oil derivative switch will be providing with rights and not any obligation to exercise the contract, and they will be providing with put option and the call option on the oil contract, which will be representative of right to buy and right to sell a certain amount of oil contract respectively and they will be helping in managing with the oil market exposure like when there would be a buying position in the oil contracts, one can buy the put option in order to hedge his exposure.

It can be exampled through put option on oil contract will be providing the right to sell a certain contract of oil before maturity date.

Oil swap are another type of derivative contracts which will be helping in swapping the stream of payments and they will be trying to swap the risk associated with oil contract so it will be helpful in managing with the oil exposure in the commodity market so they will be hedging with future exposure and settlement of oil contracts.

These contracts are generally helping in hedging with the exposure and managing with the risk associated with oil contracts and hence they will be helpful in minimising the loss and maximizing the rate of return.